First Time New Car Buyer

by Will
(Boston, MA)




Question: I'm a first time new car buyer and I want to buy my first new car soon, as my current car is on a week-to-week basis (2001 Impala, 150k miles).

I'm right out of college, but I have full-time employment with the government since Sept 2010. I have a higher credit card utilization, but not much on the limit side, so my FICO score average is currently a 630.

Using a credit estimator tool, if I lower my revolving debt by about $1,500, I can bump it up to around 660 in 1 reporting cycle. Does this matter in the grand scheme of things?

Some more info about my whole situation:

My DTI (Debt to Income ratio) is about 14%, as I have only student loans and revolving accounts. That number is going to improve to about 11% when I get my raise.

The only reason that my FICO is in the 600's is due to my irresponsibility while in college, and I let a small balance get charged off and missed some payments with other revolving accounts.

My report is flawless from about Sept 2007 onward, and I am current on all lines of credit and my student loans.

My question is this - Will that 30 point FICO score bump matter when it comes to applying for financing, given all of my other facts about my credit and ability to pay?

Currently, 15% of my monthly gross is over $500 and will improve to $650 in 2 months, and I want to finance about $20,000 for a new Civic or Elantra.

What could I expect both at the dealership and/or applying to more forgiving lenders like Chase or my local banks/CU's?



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Answer: Hi Will. The major challenges I see with getting approved for financing as a first time new car buyer (please correct me if I'm wrong) is not so much your score, but your lack of installment credit history.

The 30 point FICO score difference more than likely won't make much of a difference in whether or not you are able to get approved, but may be the difference in a few interest rate points.

If approved as a first time new car buyer and with your FICO score you'll probably find yourself with a rate in the 10-15% range.

This is easy to overcome if you are approved as you can always look to refinance after your score has gone back up. Depending on your score at that time you could expect to shave several points off that (maybe more).

Most first time buyers, whether a new car or used car, will only get approved for a loan in the 8-$12,000 range. This is again assuming no other installment credit history.

Installment loans are accounts such as auto loans, mortgage loans, personal loans, etc. Any type of loan that has a structured pay back, i.e. 3 year loan with XXX monthly payments.

Although revolving credit such as a credit card is good to get you going it is the installment loans that really build depth in your credit file.

On top of this, you have to fight short job time, but your job is with a pretty solid employer and depending on what you went to school for they may give you job credit for your schooling.

The good news is that you are looking to buy a new car and most manufacturers have their own finance sources, such as Honda Financial and Hyundai Motor Finance.

These lenders are going to do more for you than most other lenders, because they not only want to get the loan, but they want to support the sale of their manufacturers new car.

A credit union may also be a good option for you to look into, but credit unions can vary substantially in what they will and won't do for a first time new car buyer.

One option you may want to explore is some sort of government employees credit union. Ask some people in your office if they know of any that you may qualify for working where you work.

These types of credit unions may be more willing to loan a larger sum to a first time buyer. You may have to set up some sort of payroll payment plan or automatic payments from your checking or savings.

One thing that always makes a loan look more attractive to a lender is down payment. The bigger the better! A larger down payment substantially reduces a lenders risk and also may improve how you score in their internal system.

Other goodies...Your DTI, PTI and monthly income are good and will be inline with any lenders program.

Regarding your approaching pay raise, this will probably be a non factor, because lenders are all about the here and now. The way they look at it, that pay raise may never come.

Regarding Chase, I'd think they would be off the table as an option, again going back to credit depth and limited/non existent installment loan history.

Your best option as a first time new car buyer is going to be either a credit union or Hyundai Motor Finance. From what I know Hyundai is going to be a bit more flexible than Honda regarding financing.

Hope this helps,
Justin

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