When Should I Pull The Trigger On A Credit Application?

 

The credit application process can be confusing. You may know that submitting an application can affect your credit. When a prospective creditor accesses your full report, it registers as a “hard” inquiry, which demonstrates that you are in the market for credit. But not all inquiries are hard inquiries, and you can minimize the effect of hard inquiries by planning ahead.

THE SOFT TOUCH

The one concept every adult with credit should understand, at a minimum, is the difference between hard and “soft” credit inquiries.

  • Soft credit inquiries result from credit checks executed by any party that is looking for a general idea of your current credit profile. The most common example is a creditor that uses public records to check long lists of people who may be candidates for “pre-approval” offers. Some states allow prospective employers to access a limited version of your credit report as part of a background check. These types of credit checks don’t require your explicit permission, they do not include many specifics, and they don’t affect your score.
  • Hard credit inquiries are a completely different matter. They do require your permission (and, in most cases, your Social Security number), they do result in a full credit report, and they will reduce your credit score by a few points. They will also appear on the report your next prospective creditor sees. Note: Only enter your Social Security Number into a loan application if you are ready to apply and have your credit pulled. When you submit a loan application with your Social Security Number, your credit will almost always be pulled immediately.

Generally speaking, having two hard inquiries or less on your report at any given time isn’t going to have much impact overall. Three or four might not even make much of a difference. But any more than that will. Your score will be reduced appreciably and creditors may be reluctant to work with you if it appears you are desperately seeking more lines of credit than you can afford. They have to minimize their risk.

There is an exception: When a number of hard inquiries register within a short period of time, the credit reporting agencies will group them together as “one” inquiry on your report. If you are in the market for an auto or home loan, it is critical to plan accordingly.

PULL THE TRIGGER

To minimize the effect of the application process on your credit score, go as far into the process as you possibly can before you pull the trigger on a hard credit inquiry. If you can determine only one creditor is worth applying to, or if you can submit multiple applications at once, you will only lose a few credit score points. And if you have a very long credit history, have paid your bills on time, and have no other red flags, your score will likely recover in a few months, at most.

Here are a few scenarios in which you can feel safe pulling the trigger on a credit application:

  1. You are ready to buy. You have done your research, you know what you need to buy and how much it costs, and you have narrowed your selection of prospective creditors.
  2. You need a place to live. If you are in the market for a new apartment, and you find the perfect one, don’t hesitate. The credit application is just part of the process.
  3. You need a job. If your state allows employers to run a credit check, employers are within their rights to make it a condition of employment. This should, however, only count as a soft inquiry.
  4. You get an offer for a department store credit card. While there are times when store cards can be beneficial, it is in your best interest to limit the number in your wallet. If the savings are real, and you are not now or soon will be in the market for a more important purchase, it’s OK to pull the trigger.
  5. You need a credit card. Diversity is key to a healthy credit profile. If you have never had a credit card, and you are preparing for a major purchase, it may be worth obtaining one to add a “revolving credit” entry and activity to your report — even if it knocks your score down by a few points.

As you can see, there is no right or wrong way to manage credit inquiries. A good rule of thumb is to limit hard inquiries to those times when you know you wish to purchase something and avoid them the rest of the time. However, by maintaining otherwise excellent credit practices — particularly paying your bills on time and keeping revolving balances low — the impact that hard inquiries will have will be minimal.

 

How to Finance an Auto Purchase

When you walk into a dealership, you won’t be there long before a salesperson asks how you intend to pay for your new car.

When the dealer starts in, just explain that you intend to pay in cash. Saying you’ll be paying in cash doesn’t mean you’re going to open up a briefcase with bricks of money inside, it just means that you’re not interested in dealer or manufacturer financing.

In some cases (if you have perfect credit if the car is about to be replaced by a newer model) dealer-sponsored financing might be a good deal, but most of the time it isn’t. You can usually find better deals on car loans at credit unions and banks.

Telling the dealer that you’re not interested in their financing takes away an opportunity for the dealer to pad the deal with an extra profit. Dealers make money on charging you, so they have ways of slipping various extra fees and charges into your financing arrangement. Forgoing dealer financing also allows you to focus on the features and purchase price of the car you want — a far more important and useful task than focusing on the monthly payment figure.

After declining financing, your next task is negotiating the purchase price of the car. Some survival tips:

Resist the temptation to lease
Leasing is basically an extended car rental. When you lease a car, you must return it at the end of the lease or buy it from the dealer at a predetermined price — usually higher than what you’d pay for a similar used car. When you take a loan out to buy a car, you pay down the loan and then the car is yours, free and clear. The only payments you’ll have to make after that are for gas, repairs, and insurance.

Lots of people lease. Smart, respectable people lease. It’s not a terrible thing to do, but it’s not the best way to keep a car because you’re always making payments. Lease a car for three years and, when the term expires, you need to look for a new lease or shell out thousands to purchase the car you’ve been driving.

Consider factory certified pre-owned cars
 “Certified pre-owned” is another term for “used.” But these cars do come with extra assurances about the car’s condition. Going pre-owned can be a really smart move because most cars lose 18% of their value in their first year. A certified pre-owned car is one that has been inspected and fixed before it goes on the market, and comes with a manufacturer-backed warranty like new cars do.

Size up your future car loan
 Once you decide you want a new car, the first thing you should do is figure out how many cars you can afford. Calculate this amount before you go shopping; don’t let a car dealer influence your decision.

Figure out how big a loan you should get. A good rule of thumb: Your monthly car payment should be no more than 20% of your disposable income. That means that after you’ve paid all your debts and living expenses, take one-fifth of what’s left. That’s your maximum monthly auto expense. Ideally, this number should cover not only your car payment but also your insurance and fuel costs.

Decide how long you’ll give yourself to repay your car loan. A monthly payment is, essentially, the amount of your loan, plus interest, divided by the number of months you have to pay back the loan. The more months you have to pay it back, the lower the monthly payment will be. But stretching out a car loan too long—or any loan, for that matter—will ultimately cost you a truckload more in interest payments.

For example, say you take out a $20,000 car loan at 5%. If you borrow the money over four years, your monthly payment will be $460.59. At the end of four years, you’ll have paid $2,108.12 in interest.

If you borrow the money over ten years, your monthly payment will only be $211.12, but at the end of 10 years, you’ll have paid $5,455.72 in interest.

Keep your loan term to five years or less (three is ideal) and you should be in good shape. If the monthly payments are too much even for five years, the car you’re looking to buy is probably too expensive.

Consider all pools of money
 
Should you sell investments to pay for the car instead of borrowing at 7%? That’s a tough call; usually, we’d say no. Do not spend any of your tax-sheltered retirement savings (IRAs, 401(k)s), as you’ll pay through the nose in penalties and taxes and rob from your future. As for taxable investments, consider whether cashing out would have tax implications (you’ll pay 15% in capital gains for investments held longer than one year; investments held less than a year are taxed at your ordinary income-tax rate) or whether you may need that money for something else over the next two to three years.

Should you take out a home equity loan to pay for a car, since the interest of those loans are tax-deductible?

Many people think home loans are the perfect way to finance the purchase of a new car. But the length of the term for a home loan — most require payments over at least 10 years, with penalties for early repayment — will send your total costs through the roof, even after the tax savings. Borrow for no more than five years, lease (if you must) for no more than three. If you’re considering a home-equity line of credit to pay for your car, remember that most HELOCs have a variable interest rate, so it’s possible your payments will rise over time.

How to Find the Best Auto Loan
You’re going to show up at the dealer with your own loan, but where should that loan come from?

Begin by getting a sense of the prevailing rate for a new-car loan. Focus on is the APR or annual percentage rate offered by each lender. The APR is the annual cost of the loan or interest rate. With this number, you can cross-compare loans from one lender to another, so long as the duration of the loans is the same.

You’ll probably get the best deal at a credit union— a members-only, nonprofit bank that can offer lower-cost loans than a traditional bank can. But check out rates at traditional banks and online-only car lenders such as Livauto Auto Loans.

Don’t be distracted by dealerships offering rebates or zero-percent financing if you obtain your loan through them. “Zero-percent financing” means you are not charged any interest on the loan. So if you were buying a car that cost $24,000 and you had a 48-month car loan, your monthly payment would be $500, without any added interest. A rebate is a money taken off the price of the car. Rebates are also called cash-back deals.

Here’s the thing about those offers: The money you save via interest and rebates is probably coming from somewhere. If you qualify for 0% interest (and most people don’t, as it’s given only to people with near-perfect credit), your dealer won’t budge on the sticker price. If you take the rebate, you won’t get a rock-bottom or 0% interest deal.

That’s why splitting up the financing and purchasing of your car is a good idea: First, you can shop around for the best credit-union car loan, and then you go to the dealer and focus on negotiating the purchase price of the car. Bundling the transactions can lead to lots of stress and added expense — you may be so focused on financing costs that you the punt on the purchase price — to keep them separate.

If you do choose dealer financing, be extra vigilant about what you agree to, and what you’re signing—it’s not uncommon for dealers to add in various unnecessary fees (rustproofing, extended warranty) that fatten their bottom line. Question everything that wasn’t explicitly discussed during negotiation, and don’t be afraid to walk away.

There are some easy ways to catch a break with your dealer when negotiating the price of your car. Timing can be everything:

Shop early in the week
 Weekends are prime time for dealers. But if you show up on a Monday, a salesman may be more motivated to cut a deal because business will be slow for the next few days.

Shop at the end of the month
 Car dealers get monthly bonuses if they move enough metal. If you show up on the 30th and your salesperson is two cars short of a bonus, he or she may cut you a better deal so to make numbers.

Shop for a car that’s about to be replaced/discontinued
Pretty simple logic here: Things that are about to be considered “old” sell for less. If you’re looking at a 2008 Honda Accord and the 2009s are about to arrive at the dealer, you usually can get a bargain. If the 2009 model is completely new and different from 2008, you’ll save even more. (Who wants to be seen driving the old-looking model? Smart, frugal people, that’s who.) And if Honda decides the Accord isn’t selling much anymore and kills it after the current model year? (OK, fat chance, but this is just an example.) Untold riches await. As do potential maintenance headaches — remember, some cars are unpopular for good reason.

GREAT REASONS TO SHOP FOR A CAR OVER LABOR DAY WEEKEND

With the end of the summer near, Labor Day marks a time of change, and, for car buyers, that presents one of the best times of year to shop.

New 2018-model-year cars are starting to arrive at dealerships, which makes it a good weekend to check out the latest vehicles. It also means dealers are looking to move 2017 models to make space for them, and that spells great deals and discounts.

With dealerships across the country offering sales events for limited periods, expect them to be busier than normal over the coming days, but remember there are ways to save time.

Applying for financing before you shop is a smart approach recommended by the Consumer Financial Protection Bureau (CFPB).

If approved, not only will you have saved yourself the need to arrange to finance at the dealership, you can potentially save money by shopping around for the best financing deal.

Options include banks, credit unions, and finance companies, such as RoadLoans. As the online, direct-lending platform of Santander Consumer USA, RoadLoans enables you to apply for a loan when it suits you; from home, work or your mobile device.

A short, one-page application takes a few minutes to complete and consumers get an instant decision. If approved, just print the loan documents and take them with you to your recommended dealer nearby.

With a loan voucher in hand, RoadLoans customers can enjoy shopping with the confidence of a cash buyer.

And with the preapproval, if the dealership still offers you financing, you have something to compare it to and can choose the best offer.

So if you’re looking to make your dollars go further, consider shopping for a car over the Labor Day weekend, and apply for pre-approval before you go.