How Does a Car Loan Improve Credit History?

FICO, the largest credit score company, explains that there are many ways to improve credit history. They all involve responsible financial management, like keeping modest credit card balances and paying all bills by their due dates. Car loans are reported on credit reports so they help improve the credit history if they are paid as agreed.

Definition

A car loan is an installment loan given specifically for the purchase of a vehicle. It is not a revolving line of credit like a charge card that provides a person with a certain spending limit that can be used to buy anything, as long as the total purchases do not exceed the limit. Some car buyers get approved for a certain amount of money before car shopping, while others choose a vehicle and then get financing on their own or with the dealer's assistance. The Lease Guide car buying website explains that dealerships shop for loans rather than financing vehicles themselves.

Process

Qualifications for getting a car loan are the same as those for other types of credit. The lender reviews a person's credit reports from Equifax, Experian or TransUnion or the three-digit credit score compiled from that information by FICO or another provider. People who pay their bills promptly and who do not have large outstanding balances or finance-related court judgments usually qualify for vehicle financing easily. Those with spotty credit histories may have problems. They may be turned down or offed sub-prime loans with high interest rates.

Benefits

Car loans improve a person's credit history if they are handled responsibly, regardless of whether or not the borrower has had past credit problems. FICO explains that it puts a heavy emphasis on payment history when calculating scores, so on-time car loan payments are a positive influence. Lenders like to see a variety of account types, according to financial columnist Liz Pulliam Weston of MSN Money. Credit cards are popular, but they are revolving credit lines. Car financing adds an installment loan to the mix.

Considerations

A car loan cannot fix bad credit by itself. If the car buyer makes car payments on time but shirks other bills or maxes out credit card limits, the credit score will go down because FICO considers every account.

Warning

Mishandling a car loan is very serious. Late payments hurt the credit score, but most lenders include a provision in their contracts allowing them to repossess vehicles as soon as loans go into default, according to the Federal Trade Commission (FTC). In most states they do not have to give any notice before seizing a car, and repossessors can even take vehicles from private property. This is extremely harmful to the person's credit reports, and a vehicle repossession remains on their Equifax, TransUnion and Experian records for seven years, the FTC explains.

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Can I Get a Car Loan If I'm Under 18 and My Parents Cosign?

A car loan is a legally binding contract. In most states, it is not possible for a minor under 18 years of age to enter into a legal contract. As a result, it is necessary for someone over the age of 18 to cosign on the loan and on the car title, which is also a legal contract. If a parent cosigns, you should have no problem obtaining a car loan.

Legality

The first step to obtaining a car loan as a minor is to ensure the loan is legal. For this, in most states, you will need to have a person over 18 years of age cosign on the loan. Typically, this is a parent, but it may be any individual willing to cosign on your loan including an aunt, uncle, mentor or friend. This person is technically the individual with responsibility for the loan since he is the only one legally permitted to enter the contract at the time it is signed. If a lender offers to extend you a loan without a person over 18 present, you should be aware that this lender is not following the law.

Credibility

A second factor to consider is your status as a borrower, that is, your credit. If you are under 18, you are unlikely to have much credit history. Your credit score, even if you have never missed a payment on other debts you may have, will be low. If your age didn't legally necessitate a cosigner, your deficient credit history would be reason enough for a lender to require one on your auto loan.

Solution

Since both legally and financially you will need a cosigner, the best option is to approach a parent with the problem. Your parent can sign the loan with you, and you will still gain the benefit of owning the car and paying off the loan. If you default on the loan, however, your parent will be held responsible as well, and this can present a problem. Your parents will be wise to monitor your payments so their credit is not jeopardized.

Considerations

Once you turn 18, you can legally remove your cosigner from the loan. You will have to apply for modification, and the lender may change the terms of the loan without a cosigner present. This may make modification unattractive because it can become more expensive. But through such modification, you will benefit greatly from the improvement to your credit score that results from paying off the loan on your own.

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The Best Ways to Refinance a Car

Car loans are multiyear agreements that are more flexible than people realize. If you signed up for a car loan that had a high interest rate or you cannot make your current payments, you may want to look into refinancing your car loan.

Why Refinance?

There are many reasons why people should consider refinancing a car loan. For the young car buyer who was forced into a high interest rate when they purchased their car a few years ago, it is the chance to lower the interest rate on the loan and make the payments more affordable. If your credit was bad when you got your car loan and you had to have a co-signer and a high interest rate when you got the loan, improved credit can remove the co-signer and lower your monthly payments. If your income is reduced and you can no longer afford your car payments, refinancing is a way for you to reduce your payments.

Refinance with Your Current Lender

One of the best options you have for refinancing your car loan is through your current lender. Even if you are a few payments behind, your current lender may be interested in refinancing your auto loan to help you get caught back up on your payments. Lenders deal with refinancing auto loans everyday, and it is something that many financial institutions use to help people afford their cars rather than having the cars repossessed.

Contact a Third Party Lender

If your current lender will not help you, check with other lenders. Be sure to take notes and compare the offers you get to make sure you are getting the best possible offer. If you use the Internet to find lenders, be sure to call the lenders before you fill out any information on their website. Ask questions about their loans and feel confident that they are a reputable organization before you offer them any of your personal information.

Contact a Dealer

If you are trying to refinance a car you purchased new, contact the dealership where you purchased the vehicle to see if you can refinance there. The advantage of refinancing through dealerships is that they have relationships with lenders and get you a variety of deals to choose from. A dealer can also try to work a refinancing deal back through the manufacturer and get you a very low interest rate.

Things to Consider

In most cases, the process of refinancing a car loan extends the length of time you will be paying on the car. If you have paid two years on five-year loan and then refinance with another five year loan at a lower interest rate, your monthly payments will drop because you are financing less money at a lower interest rate but you will be paying for the car for seven years instead of five. If you are refinancing an older car, you may want to get an opinion from a certified mechanic as to whether or not the car will outlive a loan extension.

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How to Figure Out What Kind of Interest You are Going to Get in a New Car Loan

It is difficult to guess what interest rate you will get with a new car loan. If you go through the manufacturer's bank for incentive rates, such as 0, 1.9, 2.9 or 3.9 percent, you will either qualify or you will not. Traditional lenders use a tier scale, meaning your credit score and credit history, amongst other qualifying information, will be used to determine which rate you will get, which is not always the lowest rate advertised. It is advisable to obtain a preapproval before you shop for a new car so you know your interest rate.

Instructions

Manufacturer Financing

1

Go to the manufacturer's website of the new car you wish to purchase to view the month's incentive rates for new cars. The manufacturer's offer is often impossible for traditional lenders to beat.

2

Click on an option to visit the manufacturer's financial website to apply for the special interest rate you found, if any. Supply your credit information in the spaces provided and submit the application.

3

Wait for your preapproval. Depending on the bank, your approval may be instant, or you may receive a phone call or email with more information. If you are approved, you certainly qualify for the lowest-advertised manufacturer rate.

4

Keep your preapproval information with you for shopping. If you did get approved for low-rate financing, you can assume you will also qualify for other special interest rate offers, as well.

Traditional Lenders

5

Go to the Web pages of local banks or call to ask about interest rates. Once you've found a competitive rate, which you can gauge after viewing various lender offers, call or stop in to apply for preapproval.

6

Have any new car vehicle information handy to apply for preapproval. You'll need year, make, model and level information. Provide your credit and vehicle information to the bank representative to start your application.

7

Wait for your approval. The amount of time you'll wait for notification varies by lender, but some may require up to a week to provide your rate and approval.

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How to Buy Your First Car Without Borrowing Money

Borrowing money to pay for your first car increases your debt-to-income ratio and could possibly lower your credit rating. Additionally, indebtedness raises your stress level. To avoid debt hanging over your head, save money for your first car and pay in cash. If you do not pay straight cash for the vehicle, you will have to borrow money in some way.

Instructions

1

Set a goal for the amount of money you want to spend on a car. To avoid borrowing money for it, you must pay cash. Make a goal so you can visibly see your progress when you save money for your car. For example, if you want to save $5,000, create a poster board that tracks your progress all the way to the total amount.

2

Save a percentage of your income every month and place it into a savings account. The amount you save depends on your salary and your monetary goal. For example, if you make $2,500 per month, and you want to save $5,000, set aside $250 each month for 20 months. If your savings account is interest bearing, you will make money on the savings you put away.

3

Shop for used (sometimes called pre-owned) vehicles instead of looking at new cars. New vehicles cost tens of thousands of dollars; if you do not have the cash on hand, you have to borrow the money necessary for the vehicle. To avoid borrowing money with a loan, shop for used cars that cost only a few thousand dollars and fit your car budget. Online auction sites, classified listings and used car lots are all options.

4

Negotiate with the seller to pay less for your first car. If the car has any mechanical defects or problems with its appearance, ask the seller to reduce the price. It is easier to pay for a car with savings or your cash on hand if the price is lower than what the owner asks. Research the cost of the car using a guide like the Kelley Blue Book. Guide books give multiple prices for a car depending on its condition and mileage. Factor in the cost for taxes and registration in the final price of the car. Typically, taxes and registration cost approximately 5 to 10 percent of the sale price.

5

Pay for the vehicle with your saved money. Obtain a receipt for your purchase and have the title in hand before driving the vehicle away. You need the title to register the vehicle in your name and prove that the car is yours.

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Pennsylvania Mobile Home Repossession Laws

When consumers borrow money from lenders to finance their vehicles or mobile home purchases, they provide their vehicles or homes as collateral. If a borrower defaults on a loan, the lender has recourse to repossess the vehicle or mobile home. State laws establish the respective rights of borrowers and lenders in the case of default. In the commonwealth of Pennsylvania, creditors can repossess collateral upon default must comply with the commonwealth's consumer protection laws.

Peaceful Repossession

Under Pennsylvania law, lenders can repossess mobile homes if they do so peacefully and comply with local ordinances and nuisance laws. They may not use force or threaten violence during the repossession, but they are able to repossess the mobile home on the borrower's private property, in garages or in storage facilities.

Notice

Pennsylvania law allows banks to repossess personal property such as vehicles without notice to borrowers. However, written notice is required when repossessing mobile homes.

Right to Cure

In Pennsylvania, consumers who borrow money to finance a mobile home have a right to cure after defaulting on their loan obligations. If a consumer defaults, her lender must give her 30 days or more to cure her deficiency. If she pays the outstanding debt, her lender cannot proceed with repossession. A lender can charge a borrower up to $50 for attorney's fees and late fees before releasing its claim against the collateral.

Personal Liability

If a borrower does not make his loan fully current, his lender can proceed with repossession and sell the mobile home. If the proceeds of the subsequent sale are less than what is owed, a lender can sue the borrower for the deficiency. But the law also gives the borrower a 15-day right of redemption.

Considerations

Since state laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.

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What Is a Charge-Off on a Car Loan?

When you don't make payments on your car as you agreed to in the financial contract you signed when you bought it, eventually the financial institution, after repeated collection efforts have failed, may charge-off your car loan.

Significance

Like the failure to pay any other type debt, the charge-off of a car loan is a black mark on your credit rating.

Misconceptions

To say that an automobile loan has been charged off may give you a false feeling that that is the end of collection procedures. Actually this is only the beginning.

Effects

If the car has not been repossessed, it most certainly will be after a charge-off. The lending institution will sell it for whatever it can get.

Potential Problems

After the lending institution has sold your car, you will be liable for any amount still owed on the vehicle. You may also be liable for any legal fees connected to the repossession, collection and sale of the car.

Prevention/Solution

If you see that you are unable to make your car payments, contact the lender and try to work something out. Often this can be done, as repossession or charge-off usually costs them money.

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