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Before you can even start to consider how you are going to finance your new car, or what kind of vehicle would be best for you, you have to know where you stand financially. The best way to get a clear picture of what you can and cannot afford is to look at both your credit profile and your budget. Let's take a closer look at each.
Your credit profile
If you are looking to finance your new car with an auto loan, you will need to know how the lenders see you first. Generally speaking, they look for character and capacity to repay (based on debt, income, and collateral) when evaluating a candidate for credit. Specifically, they will look closely at a candidate's: - Credit worthiness - You must have a good credit history.
- Financial means - You must have sufficient income to make payments.
- Debt structure - You cannot be so overloaded with debt that you are unable to make your payments.
Where do fall into these three categories? Your credit profile will tell you. A consumer credit profile is a snapshot of how you re-paid the companies from whom you borrowed money. Think of it as a picture of how you have met financial obligations.
There are five categories of information on a credit profile: - Identifying information - vital statistics of name, address, social security number, date of birth
- Employment information - where you are employed now
- Credit information - credit cards, mortgages, student loans
- Public record information - tax liens, bankruptcies
- Inquiries - queries from potential creditors about your credit
Each metropolitan area has one or more credit reporting bureaus. Banks report to credit bureaus the payment history of each consumer's loan and sometimes even her checking accounts. The three main credit bureaus are: If you haven't already, contact them directly for a copy of your complete credit report as soon as possible, and check it carefully for any errors. It should give you a clear indication of where you stand with lenders, and consequently, what kind of loan they are likely to offer you for your new car.
Budgeting
The purchase of your new car should fit comfortably into your budget and not disrupt the balance dramatically. You will need to be sure your payments will not preclude you from meeting your other obligations like utilities, mortgage, or rent, for example.
Additionally, be sure to think carefully about how your car purchase will affect your long-term financial picture like saving for your retirement or your kids' education. If it is going to have a significant impact on issues like these, you may want to reconsider, or at least look at a less expensive vehicle.
HerTip Be sure not to factor solely the initial cost of the car into your budget. The monthly maintenance -- including insurance, gas, storage and repairs -- must be examined as well in order for you to accurately determine whether or not you can afford the car.
Visit our class on the basics of budgeting to review the concepts behind how to construct a working budget or how to refine the one you may already have.
Continue to: Part III: Pricing Your New Car
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Determining how much car you can afford