Car Loans Can Help Your Credit

Have you purchased a new or used car recently? Irwin Toyota is hosting a New Owner Event this Thursday evening (9/14) from 5-6pm and YOU’RE INVITED!  Purchased elsewhere?  YOU’RE INVITED!  Join us for an evening of food, prizes, and education on maintaining your vehicle, how to keep its value, and optimize your gas mileage! We’d love to have you here with us!  Plan to be in attendance?  You can RSVP to Ed Kelley at Edward.Kelley@irwinzone.com or by calling 603.581.2953.  We look forward to seeing you there!

If you are planning to finance the purchase of a new or used car, you are going to need to decide how much money to put down. Putting money down on a loan has several advantages, the most obvious of which is that the more you put down upfront, the less money you have to borrow, which lowers your monthly payment. There is another important way that putting money down can lower your payment: it can actually get you better interest rates from the bank. Lenders base the interest rate of the loan on the perceived risk of the loan. Someone who put $2,000 down on a loan is seen as being less likely to default on the loan than someone who puts no money down, and therefore may receive a lower rate on the loan than someone who puts no money down. A lower rate coupled with a smaller loan can knock some serious money off you monthly car payment! Putting money down on your loan has the added advantage of helping to protect you from being “underwater.” A vehicle is considered “underwater” when the amount owed is greater than the value of the car. Vehicles depreciate in value over time, but they depreciate at a faster rate during the first year. New vehicles, in particular, depreciate as soon as they drive off the lot for the first time and are no longer “new.” Putting money down, helps to offset this depreciation, as it keeps the size of the loan smaller relative to the value of the vehicle. How much should you put down? It is entirely up to you. You do not have to put any money down; it is just advantageous to do so. Traditionally, a 20% down payment was considered standard, although Edmunds.com reports that the average down payment these days is closer to 10%. Again, the more you put down, the smaller the loan, the lower the payment, and the better the rate. If you cannot afford to put money down but you are concerned about owing more than your car is worth in the event that your vehicle is totaled, we offer a product called “GAP insurance” that will cover the difference. One of our financial services managers would be delighted to tell you more about this product if you have any questions.

It is important to maintain a good credit score. A high credit score gets you access to the lowest financing rates, meaning that you will pay less in interest when you borrow money to finance the purchase of something like a car or home. Additionally, many employers (and even some landlords) pull credit checks on applicants to determine if a prospective employee or renter pays his or her bills on time. But sometimes, life events happen that can lower your credit score. Maybe you lost your job for a time, maybe the mortgage crisis struck too close (literally) to home, or maybe you just fell behind on a few payments due to an emergency or medical crisis. If these things happened to you then your credit score almost certainly a hit. If you are looking to rebuild your credit, a car loan is an excellent way to do so. The standard unit of determining credit worthiness is called a FICO score, which is named after Fair Isaacs and Company, the firm that pioneered this scoring process. Your credit score changes over time, and moves up and down based on factors such as opening up new lines of credit, paying off older accounts, and so forth. According to Fair Isaacs and Company's website, a FICO score is based on 5 factors with different weighting: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). By examining the criteria that make up a score and their relative weighting, we can infer that a good score will be earned primarily through a history of making payments on time, on accounts that have been open for a long period of time, and with outstanding balance on "good" credit (e.g. car loans and mortgages) rather than on "bad" credit (e.g. credit cards). This shows that taking out a loan to buy a car, and making payments on time will make a good score even better. Moreover, it shows that a car loan can also be a good step towards repairing a credit score that is not as high as you would like. Since payment history is the most heavily weighted category (35% of the total score) and a car loan is also one of the "good" types of credit used, taking out a car loan and making timely payments can begin to repair a credit score quickly.