Editorial Policy

Credit scores critical when car shopping

Allie Johnson

September 25, 2013

More consumers are using credit to buy new cars, new research shows — and good credit is vital to getting a good deal.

The September 2013 report, by Experian Automotive, shows that almost 85 percent of consumers acquired a new vehicle either with a loan or lease in the second quarter of 2013. That's up from just under 80 percent in the second quarter of 2008, before the recession.

Whether you're getting a loan or leasing, having good credit will help you get the best terms. These five tips will help you research your options, take stock of your credit and give your score a boost before buying.

1. Decide whether to buy or lease

Leasing is on the rise, at 27 percent of all new vehicle sales, up 3 percentage points from the second quarter of 2012, according to the Experian report.

“Leasing is becoming more popular now, but it's not for everyone,” says Philip Reed, senior consumer advice editor for the automotive site Edmunds.com.

For example, he says, leasing might not be a good choice for drivers who are rough on their cars or prefer to drive their vehicles for many years.

In fact, buying typically provides a better value for most consumers, says Linda Sherry, director of national priorities for Consumer Action. She recommends that anyone considering leasing factor in all the costs, including money down, sales tax and the premiums for the required levels of insurance coverage.

But leasing can make sense for some consumers, Reed says. For example:

  • Drivers who want to get into a new car every few years or who place a high importance on driving a nice vehicle.
  • Professionals — real estate agents, for example — who need a nice car for work or who frequently drive clients.
  • Business owners who want the tax deduction leasing can provide.

One advantage of leasing, Reed says, is that it protects you from market fluctuation.

“Maybe you buy a big SUV and three years later, gas prices are extremely high,” Reed says. If you had leased that vehicle, you could trade it in for, say, a hybrid.

And the low cost of the monthly payment for leasing — less than $200 a month in some cases, Sherry says — “really appeals to many people.”

2. Check your credit before you shop

Finding out exactly where you stand credit-wise gives you a big advantage when you do start looking for a vehicle.

If you're after a car loan, your credit score will determine what interest rate you pay. Having bad credit — and getting a higher interest rate — can increase the cost of a car significantly. When it comes to leasing, you're not asking for a line of credit, but your credit still matters. The car dealer will pull your credit reports to make sure you can be trusted to keep up with the monthly payments. If your score is too low, you might be rejected outright or required to make a larger down payment.

So check your reports at AnnualCreditReport.com, Sherry recommends, and consider buying your credit score from each of the three major credit bureaus. MyFICO.com now offers a package of the three scores for $54.85.

“It can be worth it,” Sherry says.

FICO has estimations for how much interest you can expect to pay for various credit score ranges. Once you get into the 600s, expect your interest rate to jump.

3. Shop for financing before you look at cars.

If you're going the loan route, once you know your credit score, don't go straight to a dealer. Instead, apply for auto financing at a credit union, bank or online lender, Reed recommends.

This accomplishes two things, Reed says. First, the lender runs your credit and tells you what interest rate they're willing to give you.

Second, some lenders allow you to get pre-approved for a certain amount, then give you a cashier's check with the amount left blank. You're under no obligation to use the check, but you can take it to the dealership and write in any amount up to the approved amount. This gives you an advantage at the dealership, as you've essentially locked in an interest rate — but can try to negotiate a better one with the dealer.

“The check can be used as a bargaining chip,” Reed says.

4. Let your credit shape your shopping tactics

At this point, you know your credit score and what kind of interest rate you're likely to get. Your shopping experience, however, will vary, depending on your credit. FICO scores range from 300 to 850 — the higher, the better.

Excellent credit: If you have excellent credit (generally a score above 760), you have a lot of negotiating power, Sherry says. Expect to be able to negotiate for the very best terms. You should qualify for the most competitive financing deals, such as 0 percent or very low interest for a certain time period. When it comes to leasing, you should expect approval. You're also in a better position to negotiate the cost.

Good credit. Credit scores between 720 and 760 generally fall in the “good” range.

“Having good credit means you can go anywhere and any dealership would be happy to deal with you,” Reed says, and you should be able to get a competitive interest rate.

Shaky credit. If your credit is iffy (below 700), your course of action might depend on how much you need a car. If you can wait and your credit needs only minor fixes, it might be a good idea to take care of the problems and reapply for a loan or lease in six months when you'll qualify for better terms, Reed says. Or you could consider paying cash for a used car.

If you do go to a dealer, you'll be in a weak position, he says.

“Dealers have a description of this kind of person,” Reed says. “'Get me done.' The attitude is sort of, 'Do me a favor and finance me — I don't care how you do it.' You don't want to be in that position.”

There is some good news for those who have less-than-stellar credit and need a new set of wheels: They're more likely to be approved for a loan than in the past. According to the Experian report, subprime consumers made up just over 27 percent of those who got new vehicle loans in the second quarter of 2013. That's up from about 25 percent in 2013. Still, approval doesn't mean good terms — those with lower credit scores can still expect higher interest rates.

5. When you're ready, go to a dealership to get your new ride.

Walk into a dealership, and a salesperson might ask you what monthly payment you can afford to make. But, Reed says, “That is not a good question to answer.”

Talking in terms of the monthly payment obscures the real price of the car and puts you in a weaker negotiating position, he says. So, you should always first discuss the overall price of the car (or, if you're leasing, the amount, including fees, you'll end up paying over the life of the lease). If you're buying, this discussion becomes easier if you already have financing.

“You can say, 'I'm a cash buyer. Let's talk about the price of the car,'” Reed says.

Once you've settled on a dollar amount for the vehicle, you can sit down with the dealership's finance manager who might offer to give you an even better interest rate than you're getting from the other lender.

You can say yes, Reed says, “as long as all the other terms of the deal stay the same.”