- What is a credit score? Can I see my credit report?
- How can GMAC, Ford Motor Credit and other automotive finance affiliates offer 0% financing?
- Is it a good idea to finance a vehicle at a
dealership?
- I owe more on my vehicle than it is worth. How did that happen?
Credit
scores are being used for everything these days, including
mortgages, credit cards, insurance, and even employment decisions.
Your credit score is an important factor in your ability to
receive credit. While a credit report can be considered
your detailed financial history, a credit score is an objective
summary of that information. A credit score measures the likelihood
you'll repay what you owe, and it is based on information
in your credit report. In other words, it represents your
creditworthiness as a number.
The higher your credit score the more likely
you are to be approved for a loan and receive a favorable rate.
Your credit score is a fluid number, and it changes as the
elements in your credit report change. For example, payment
updates or a new account could cause your score to fluctuate.
The score
ranges from 300 to 850, with a higher score indicating a lower
credit risk. For a score to be calculated, your credit report
must contain at least one account that has been open for six
months or more, and at least one account that has been updated
in the past six months. To get
the best rate on a loan you generally need a score
of 700 or above.
This chart
shows an example of how interest rates for a mortgage loan
can vary based on your credit score:
| FICO
range |
APR |
| 720-850 |
5.66% |
| 700-719 |
5.79% |
| 675-699 |
6.32% |
| 620-674 |
7.47% |
| 560-619 |
8.53% |
| 500-559 |
9.29% |
Source: myFICO.com
The
difference in these rates illustrates how your FICO score
helps determine what you will pay for your loan. The actual
interest rate for which you qualify may depend on several
other important factors in addition to a credit score, such
as your income, down payment, debt-to-income ratios, additional
credit related evaluations and other lender-specific criteria.
How credit scores
are calculated
A FICO
score is based on five key factors:
- Your
payment history (which accounts for the biggest chunk --
about 35% -- of your score);
- How much you owe on all your accounts compared with your
available credit (about 30% of your score);
- The length of your credit history (about 15%);
- How much new credit you've been seeking (about 15%);
- The types of credit you use -- is it a healthy mix? (about
10%).
Credit Score Analysis
The Credit Union can provide you with a personalized credit score analysis at no charge. One of our trained representatives will tell you what you're doing right and
what you're doing wrong. The analysis reveals what your credit
score means to you and to lenders. Credit
score analysis tells you how lenders are likely to evaluate
your credit history. With the personalized guidance available through
the credit score analysis service, you will know precisely
how to raise your scores -- whether through paying off balances
on certain credit cards or even expanding your use of credit.
Why you should
check your credit score
Paying
attention to your credit score can pay off -- keeping your credit score
high can save you a significant amount of money in finance charges over a lifetime of borrowing.
How to improve
your credit score
In general,
the following behaviors are likely to improve your credit
score:
- Consistently
paying your bills on time
- Keeping
your overall debt at a reasonable level relative to your
income
- Actively
and responsibly using several credit cards
Automotive manufacturers want to sell as many of their vehicles as possible. Manufacturers will offer a variety
of marketing promotions to get consumers to buy. The most common form of incentive has been the rebate. Just like a
coupon at a grocery store, the manufacturer promises to rebate part of the sales price back to you. Another form of
marketing incentive is the below market interest rate. These offers can be as low as zero, depending on the level of
rates in the economy.
How does this marketing scheme work?
Automotive manufacturers own finance companies that are a source of additional income for the corporation. General Motors
owns GMAC, Ford Motor Company owns Ford Motor Credit, etc. These finance subsidiaries 'floor plan' most dealerships. This
means that the dealership borrows money from the finance subsidiary in order to purchase new vehicles from the factory
to sell at the dealership. Every day that the purchased inventory stays at the dealership, there is an additional cost
to the dealership in form of additional finance charges.
The automotive finance companies also have a 'retail' arm, which the dealers can use to provide financing at the
dealership. Dealerships gain additional income from the financing arrangement and get the opportunity to keep buyers
in the showroom before they have a chance to 'compare'.
The manufacturer can promote vehicle sales by ordering it's finance subsidiary to lend money at rates that are below
market. This is not a healthy business practice, but manufacturers are sometimes left with no choice; either take reduced
income or settle for no income at all. However, by careful manipulation of the terms of the offer, manufacturers can minimize
their losses.
What to watch out for
As with most marketing gimmicks, there are catches to the zero percent offers. Unlike a rebate, which applies to all
purchasers, the zero percent finance offers are subject to a satisfactory credit rating. A recent study indicated
that less than 25% of purchasers qualified for the zero percent offer. In addition, zero percent financing may only
be offered on slow selling models.
How do you know that the zero percent offer is the best deal?
Remember, the zero percent offer is designed to get you into the dealership. Once you are there, trained salespeople
will attempt to MAXIMIZE profit. It is up to you to do the math. Refer to the Frequently Asked Question 'Is it a good idea
to finance a deal at the dealership?' for ideas on how to get your best deal.
Before you buy a car at a dealership, you should be aware that the dealership
is in business to maximize profits. When shopping for a car, most people decide to obtain a loan through
the car dealership itself. It's certainly the most convenient option, and dealerships promise you the best available rate.
However, don't assume they are telling you the truth. Dealers simply offer to arrange financing for you.
They are not actually putting up the money themselves. Once they find a financial entity to loan you the money,
they ROUTINELY add percentage points to your loan rate. For instance, let's say you qualify for a loan at 6 percent
interest rate. The dealer may tell you that you actually qualified for a 9 percent rate. You pay the 9 percent,
and the dealer pockets the extra 3 in the form of a lump-sum payment from the finance company. This is an accepted
practice among dealers - and it's legal. (Note: the credit union does not allow this practice) The Consumer Federation of America released a report, revealing that this
practice costs consumers up to $1 billion annually, adding at least $1,000 to the cost of an individual's auto loan.
About 1 in every 4 consumers gets hit with a marked up rate.
Dealers justify this practice by saying that they should receive a fee for arranging financing and handling paperwork.
Consumers should also realize that the finance folks at the dealerships typically earn commission from any additional
interest they tack onto a loan. In other words, their interests are in direct conflict with consumer interests.
While there are no laws regulating rate mark-ups, auto companies and groups are making some voluntary improvements.
General Motors declared dealers could only mark up rates 3 percent.(Note: the credit union pays any dealer on our approved dealer list
a small fee for processing paperwork. Of course there is no assurance that the dealer will correctly advise you of
credit union rates and terms if a better fee can be obtained elsewhere.)
The dealership can make money in many additional ways. Consider the following list:
- Sales Price - The MSRP (Manufacturers Suggested Retail Price)
is found on the sticker of a new vehicle. You should be able to
purchase a vehicle for less than the sticker price. The dealer buys
the vehicle from the manufacturer for a price called the invoice
price. The dealer profits from every dollar that you pay above invoice
price.
- Hold back and Rebates - Even if the dealer sells you a vehicle for
a price that is just over invoice, there are kickbacks that the dealer will receive
from the manufacturer after the sale. On occasion, manufacturer's
rebates are available, but the dealer has no obligation to pass the savings
to you.
- Trade-in - The dealer will almost never pay you what
your vehicle is worth when you offer it as a trade-in. The dealer will
usually pay up to the wholesale value of the vehicle, which is considerably
less than you could get by selling the vehicle yourself. Some dealers
will attempt to confuse you by showing you what your vehicle is supposedly
worth from a used vehicle valuation guide that is not an official pricing
guide. You can get an official valuation of your used vehicle from
the Credit Union before you go shopping. Some dealers will offer
you a good price for your trade-in and then up the price of the new vehicle.
- Insurance - Buying any form of insurance through a dealership can
be very expensive. Credit life insurance, credit disability insurance,
GAP insurance and warranties sold at a dealership are usually priced much higher
than comparable insurance that can be purchased at the credit union.
How can you assure yourself that you are getting the best deal?
There is only one way to assure yourself that you are getting the best deal. You must COMPARE! Do not trust the
dealership to represent your best interest. Check with the Credit Union before you buy. Remember, your Credit Union
is a non-profit organization. We will do our best to provide you with straightforward, honest answers.
It is not unusual to find out that you owe more on your trade-in than it is worth. For years consumers have been encouraged
to finance 100% of automobile purchases. In fact, most consumers not only finance the entire sales price, but taxes and
expensive add-on's such as warranties and various forms of insurance. Consider this fact and the fact that an automobile is one
of the fastest depreciating purchases that you can make, and it is no surprise that you can end up owing thousands of
dollars more than your vehicle is worth when you get ready to purchase a new car or truck.
What can you do when your vehicle is worth less than the balance on your loan?
A car salesman is likely to recommend that you add the difference between what you owe and what you get for the sale of your used
vehicle to the sales price of the vehicle that you are buying. This practice is called being upside down. If you allow
this to happen it is a very bad idea. By failing to deal with the imbalance, you will simply compound the problem, making
things much worse when you are ready to purchase your next vehicle. Not only will you have a much larger imbalance between
your loan payoff and the value of your vehicle, if your vehicle is stolen or totaled, the insurance company will only pay
off the book value of your vehicle, leaving you with a loan that you must pay off! Here are some tips for dealing with the problem:
- Find out if you have credit life insurance, disability insurance or GAP insurance. You may be eligible for a refund of premiums
if you are paying off a loan early.
- Take out a short term unsecured installment loan from the credit union to pay off the difference.
- Postpone the purchase of the new vehicle and concentrate on paying as much additional as possible to your vehicle loan
over the next year to bring your balance back in line with the vehicle value.
- Sell your used vehicle yourself. You will get a much better price from a private sale.
SageLink Credit Union
Revised: June 10, 2006
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