By Cedric Sheldon
And now you are faced with a dilemma — do you ask your parents to co-sign your loan or are you comfortable with trying to get a loan on your own, with the opportunity to build up your credit?
Although the first choice is the easiest route to take, it won’t do anything to help you build your credit. The second choice, as difficult as it may seem to pull off, is still possible even for the student with no credit or bad credit.
A few years back, right after the stock market meltdown, your chances of receiving credit would have been nil. Today, your prospects have improved simply because lenders are willing to loan money to people whose credit score is in sub-prime territory. Not too many lenders will do so mind you, but enough of them to make it worth your while to find out more.
The change has come about largely because there is always demand for credit from people who have no established credit or bad credit, what lenders call “subprime buyers.” Lenders look at each loan application individually, but the following are three points to help you get behind the wheel of a low-cost new or late model used car:
1. Ask your parents for help — You’ll still build credit if you apply for a loan yourself, but your payments must be something that you can manage. This is where your parents can help: by providing you with the cash you can use toward your down payment. The larger the down payment and by trading in your clunker, the more cost effective for you. If your parents “gift” you some money, then they can show you that gift on their income tax return. They’ll get a tax deduction and your payments are be more manageable even with a part-time job.
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2. Find out your credit score — Not sure where you stand credit-wise? You can find out quickly by visiting MyFico.com and pulling up your credit score. You won’t have a score, however, if you’ve never applied for credit. But, even most students have a credit score and just aren’t aware of it. Likely, since you went off to college, you did SOMETHING to trigger a credit alert, such as having received a cell phone in your own name. A score below 598 means your credit is bad, so be warned.
3. Talk to lenders — Before you apply for credit, ask a lender if he can work with you. Some will tell you immediately, “no,” while others will want to learn more about what kind of car you’re looking for, your down payment, income and savings. You may not be able to buy that $17,000 brand-new Ford Fiesta, but you might receive approval for financing a 2009 Kia Spectra hatchback in very good condition that a private party is selling for $10,345, the price Kelley Blue Book says that it is worth. Chances are the Spectra is in much better shape than your current ride!
If all three points work out for you and you have the means to make your monthly payments, then go ahead and apply for a loan. Keep your loan terms to no more than 48 months with terms of 36 or fewer months even better. You’ll build credit by making timely payments every month and that will put you in a better position to get a new car after you graduate and land a good-paying full-time job.
Cedric Sheldon writes for the Olathe Toyota Parts Center and its Toyota Parts Blog, the latter featuring “no bull” experts from a wide array of disciplines: engines, electrical, fabrication, transmissions and other disciplines.
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