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Get help with debt before seeking an auto loan

Created: On September 8, 2011 @ 12:09 am In

If you have plans to finance a vehicle anytime soon, it’s a good idea to get help with debt first to boost your credit score. Having weak credit could result in getting a higher dealer rate markup, according to the Center for Responsible Lending (CRL). As a result, people with lower credit scores are more likely to default on loans and have their vehicles repossessed.

Targeting people with low credit scores

The dealer rate markup is the hidden rate auto dealers add to a customer’s loan when they sell the note to a third-party lender. According to the CRL report:

In particular, on loans made through the dealership, the dealer can markup the interest rate above what the consumer’s credit would qualify for. This interest rate markup, also known as “dealer reserve” or “dealer participation,” is described by dealers as the way they are compensated for time spent putting a financing deal together. However, since consumers usually do not know what they can actually qualify for, the markup is often a hidden cost for the consumer.

The average rate markup in 2009 was $714 per consumer with an average rate markup of 2.47 percent (1.01 percent for new vehicles and 2.91 percent for used cars). Consumers who financed through dealerships can end up paying over $25.8 billion in interest rate markups over the life of their auto loans. You’re likely to get a larger rate markup if you:

Get a loan with a longer maturity
Purchase a used car
Finance a smaller amount for a vehicle

The CRL report also found that rate markups are strongly related to 90-day delinquency rates for finance companies that target borrowers with low FICO scores. Rate markups increase the odds of delinquency by 12 percent.

Find the right debt solutions

Hold off on purchasing a vehicle until you look for ways to deal with credit card debt and other bills that may be dragging down your credit score. Among the debt solutions you may want to consider are debt counseling, debt settlement, working with a debt consolidator or a combination of these methods.

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