FINANCES
Buying a car
1. When purchasing a car, how do you determine the amount of your down payment and how much monthly payment you can handle?
The best way to determine how much monthly payment you can handle is to complete a monthly budget. Start with the amount of your take home pay and deduct your monthly expenses (fixed, flexible and variable expenses). Don’t forget to include the expenses associated with the new car: gasoline, insurance and maintenance. D e t e rm the amount of your down ine payment after you determine how much you want to pay as a monthly payment. Let’s say for example that you want to buy a car that costs $15,000; the special finance rate is 0 percent (for example). After completing your budget, you determine that you want to pay $250 per month for 48 months – this totals $12,000. In light of this, your down payment needs to be $3,000. There might also be a chance that the financing source is only willing to finance $10,000 of this same vehicle. If such were the case, then, your down pay-
by Donald Ferguson, GMAC
ment would increase to $5,000.
2. What is the down payment formula?
Great question: Down payment = Cost of car – amount financed
money to use toward the purchase of a car. Do auto companies honor this and is it dollar for dollar?
Actually, when you are buying the car from a dealership, it will allow you to use the credit card money back program toward the purchase of a car. Most of these offers are for the purchase of a new car and the value is normally dollar for dollar.
3. How does the FICO score affect the purchase of a car, and how may I review and discuss my FICO?
A number of lenders use FICO scores to determine the risk associated with financing. Norm a l ly, the higher your FICO score, the lower the rate offered when purchasing your car. The lower yo u r score, the higher the risk and that leads to a higher rate. You can review your FICO score by ordering it from www.myfico.com. There is a small charge to request this score. If you decide to purchase the standard FICO score, you can request a free simulation that reviews your score and analyzes your personal credit information. It also answers questions such as “What happens to my FICO score if I pay off a credit card or open a new account?”
5. Some Christians talk about good debt and bad debt, good debt being when a saleable asset is tied to the loan and bad debt when there is no saleable asset tied to the loan. Is a car loan a good debt or a bad debt?
Oh, tricky question! I’ll answer it this way. Based on your description, a car loan could be a good debt or a bad dept. If the value of the car is more than the amount owed, based on your description, you have a good debt. If you owe more on the car than it is wo rth, then, you have a bad debt. This is exactly why it is so important to understand your purchase up front. We offer some suggestions on our website, www.SmartEdgeByGMAC.com that
4. Some credit cards give you back
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helps make you a more informed consumer. Budgeting, maintaining good credit, and understanding your options and choices make your car buying ex p erience a good one.
6. Is there any special way to save money for a car?
There is no special way to save money for a car – we each do it a different way. Allow me to share mine. I pay myself first. I open an account with GMAC Demand Notes and have my employer deposit a specific amount from each of my paychecks. The question I ask myself is how much I want to withhold per paycheck. If after I complete my budget, I d e t e rm that I can afford $250 per ine month, then, since I am paid twice a month, I ask that $125 be withheld from each check for a total of $250 per month. Not only am I saving for the down payment, but I also can continue to set this much aside each month, telling me that I can comfort a bly make the monthly car payment.
7. When is a co-signer on a car loan necessary? Is a co-signer on a car loan okay according to scripture?
First, let me say that scripture and many financial planners discourage cosigning. Howeve r, a co-signer may be requested for a number of reasons, such as, the borr ower has insufficient credit, insufficient income, limited work ex p e r ience, some deroga t o ry credit, and/or a host of other reasons. Even if a co-signer is requested, the borr ower should determine whom the co-signer should be (a lender cannot request a specific person to co-sign). The important thing is that the co-signer understands that s/he is guaranteeing the loan, should the main borrower default for any reason. My son recently turned 18 and gr a d uated from high school; he is going to college in the fall. I took him to the local bank to open a checking account and to help establish his credit. He requested a $1200 loan for 12 months. Almost immediately, we were asked if he had any credit – which he did not. With that, we were told that it might be difficult to get the loan approve d, unless I was willing to cosign for him. Armed with some prior credit experience and some of the tips outlined in our seminar (www.SmartEdgeByGMAC.com), I carefully explained to the manager that because my son just turned 18 (he was
not permitted to have credit in the past) this means he has no bad credit. He has maintained a positive savings account balance with this bank for the last 10 years. In addition, he works part time and his income more than supports the amount of the loan request. Next, I told them that the $1200 loan would purchase a 12-month Certificate of Deposit with the bank, and they could use this CD as security for the loan. We would set up automatic loan payments from his checking account so all car payments would be made on time. After consideration, the loan was approved, without a co-signer and a 7 percent interest rate – not bad for his first loan. He is on his way to establishing good credit on his own. Good credit is indeed your power to negotiate, and understanding credit can help you build wealth.
finance the car. Whenever someone checks your credit r e p o rt (called an external inquiry), this may indeed affect your credit score. If you decide to finance the car and ask the dealer to check your credit report, make sure he uses the “automotive code” since credit requests for auto loans within a 14day period are considered one inquiry. 9.What is the difference between bankfinanced and in-house or dealerfinanced? How can you lower the interest rates without paying additional down payments? An individual can go to a bank, credit union or other financing source and request a loan; this is considered direct financing. The proceeds of this loan pay the car dealer. For dealership financing, which is most common, the bu yer arranges financing with the car dealer. The dealer then usually sells the contract to a bank, credit union or finance company. To lower the interest rate without paying additional down payments, one could look for special finance rates, like the special 0 percent GMAC finance rate of the recent past. As mentioned earlier, one of the best ways to lower your rate is simply to neg otiate with your dealer or bank. Remember, the better your credit, the better your chances are for lowering your rate.
8. Should you allow a dealer to check your credit when you are looking for a car or when you have made your decision to purchase the car? Is there any affect on your FICO score of having your credit checked?
You should not allow the dealer to check your credit until you have made the decision on which car you want to purchase. Buying a car and financing a car are two separate transactions; make sure you negotiate on the price of the car and on the finance rate, if you decide to
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