One of the number one things I tell clients who are looking to purchase a car is not to go to a dealership for financing. Dealerships “shop” your credit. This means that they submit hard credit pulls to multiple banks. On average, they usually run between three and five pulls, however I’ve seen clients who have had up to fifteen pulls from one dealership. Each credit pull can negatively effect your score and remains listed on your reports for a two year period. If you have over six in a two year period you are going to see your FICO score decrease almost 10 points for each additional pull, Many companies now have a six pull automatic denial system; meaning, if you’ve applied more than six times for anything you are automatically denied in their system.
Dealerships “shop” credit with a claim that they are trying to provide you with the best interest rate. While for many this may be true, for others this claim is false. Dealerships get a cut of the financing. The more you pay the more they can receive. So why would they give you the best interest rate?
What does this mean for you? Be proactive.
Step One: Find out your FICO Scores.
Step Two: Call some local credit unions in your area and ask for their interest rates and chance of approval for your situation; make sure to tell them: your current FICO score (not credit score! See previous article: Credit Scores vs. FICO scores), current income and amount desired. Do NOT give permission to pull your credit, these are simply fact finding phone calls.
Step Three: Choose the credit union with the lowest interest rate and highest chance of approval.
Step Four: Apply with that credit union for your desired amount.
Step Five: Take your pre-approval to the dealership.
You are likely to find at that point that the dealerships employees may not like you much. Or they may offer you a “better rate if you apply with us!” Keep in mind, you’ve already done your research and found the best rate. While you may get a hard time you will still walk off the lot with the car of your choice and the best deal possible.
What should you consider a good rate? Anywhere between 1.99% and 6% depending on your credit. Any higher than 6% you should fix up your credit and go back for the loan another time. If you are currently financing at over 8% think about a re-finance ASAP.
Good luck auto shoppers!
