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Building Credit: Tips for Buying Smart on Your First Car

ID-10078277Buying your first car is a great way to start building credit. Even if you have cash in the bank, a car loan will establish your credit history for the future. Many first car purchases must deal with a zero or blank credit score. Unlike the person with poor credit, the first-time borrower must do more work than simply strike a great deal with the car salesman. Note: If you do have the cash and you are just building credit you should arrange to pay off the loan as quickly as possible.
Don’t let the excitement of buying a new car distract from the seller’s fine print. Making an avoidable mistake can cost money and quickly void any savings negotiated on the deal. Consider these tips for building credit and buying smart on your first car.

#1. Avoid focusing on the lowest monthly payment and lock in the best purchase price. Many cars are sold to unwary consumers based on an inexpensive monthly payment, which is often a financial trap. While it is essential to understand if a monthly car payment is affordable, keep the information about the level to yourself. Buyers who share this important detail forfeit the ability to negotiate a better purchase price.

Telling the car salesman about how much you can afford each month is likely to tempt him or her to tack on higher interest charges or add-on fees. Remember to negotiate each part of the transaction separately from the others. The total cost, financing rate, and trade-in (if any) should all be negotiated separately.
#2. Think Outside the Box. Consider opening a savings account at a local credit union before you buy a car. Save as much money in the account as you can over at least one year. Then, apply for a car loan from the credit union. The loan terms are likely to be much better than those of a hungry dealer. Many credit unions can provide an auto financing credit report and better rates than banks and much better than the dealer (on used cars).  Some credit unions like Saginaw Medical Federal Credit Union have arrangements with local dealers so you can finance through them but do all the paperwork at the dealer.

#3. Arrive Prepared to Discuss Creditworthiness. It’s a big mistake to let a hungry car salesman define your car loan interest rate. A new buyer without an extensive credit history may not have a credit report on Experian, TransUnion, or Equifax. Plan to check yours before heading out to purchase a car. Bring along a year’s worth of cancelled checks for rent payments, utility bills, or student loan receipts. Demonstrate stability with an employer or landlord letter of reference.
Buying a new car on credit is a relatively simple task for an experienced consumer. A high credit score helps him or her qualify for a lower car low rate.

#4 Small Things Can Really Be Big Things. A single saved percentage point from a car loan of $15,000 paid over 5 years may not look like much. But it can make significant difference over the loan term. For instance if your interest rate is 5% your payment on $15,000 would be $283.06 plus Taxes, Licenses etc. If your rate was 6% your payment would be $289.99.  Only $6.93 per month! No big deal right? But over 60 months that comes out to $415.  How long will it take you to earn an extra $415? Remember this is net after tax income you are throwing away. So you might have to earn $500 in order to have that $415 to throw away. At $10/hr. that means 50 hours of work totally wasted.

#5. Consider a Larger Down-Payment. Buyers with cash in the bank can use a larger down-payment to negotiate a better deal. Monthly payments may be lower, or the car loan term shorter. The credit benefit to the first-time car buyer is substantial. He or she pays down a smaller loan and enjoys the benefits of a good credit history. It might be worth the money to spend a bit on the down-payment.

Buying your first car can be nerve wracking. Especially when you don’t have much in the way of credit or funds. Use these tips to help you find the payment plan that will work for you.


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