Photo By Tarik Bell
Don Ferguson ,GMAC Director of Minority Dealer Development Relationship Marketing and Diversity, far left, is joined by colleagues at the GMAC booth in the Congressional Black Caucus’ Expo Hall during the 35 th Annual Congressional Black Caucus Foundation Legislative Weekend.

• First things first: 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 then deduct your monthly expenses (fixed, flexible and variable expenses). Don’t forget to include the expenses that will be associated with the new car – like gasoline, insurance and maintenance.

• Determine the amount of your down payment after determining how much you want to pay as a monthly payment. Lets say for example that you want to buy a car that costs $15,000; the special finance rate is 0% (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 must 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 is the case, then, your down payment would increase to $5,000 if you wanted to buy this car.
  

2. What is the down payment formula?

• Great question: Down payment = Cost of car – amount financed
  

3. How does the FICO score affect the purchase of a car and can I review and discuss my FICO ?

• A number of lenders use FICO scores to determine the risk associated with financing for an individual. That said, normally, the higher your FICO score, the lower that rate offered when purchasing your car. The lower the score, the higher the risk, and therefore the higher the rate.

• You can review your FICO score by ordering that score at www.myfico.com. There is a charge to request this score, around $15.00. 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 and answers questions such as, "What happens to my FICO score if I pay off a credit card or open a new account?"

4. Some credit cards give you back money to be used toward the purchase of a car. Do auto companies honor this and is it dollar for dollar?

• Actually, since you are buying the car from a dealership, they are the ones that will allow you to use the credit card money back program towards 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.

 

5. Scripture says “neither a borrower nor a lender be.” Is a car loan okay in light of this?

• This is something my father taught me years ago – he called it a $5.00 friendship. He always said that if you loaned a friend $5.00 and that friend never paid you back – you’d be friends for life. The reason is - $5.00 was not enough for you to get upset and since that person never repaid you – he’d never ask for more.

[from Hamlet by William Shakespeare; Polonius speaking: "Neither a borrower, nor a lender be; For loan oft loses both itself and friend"} Example question: "Could you lend me twenty dollars?" Answer: "Sorry, neither a borrower nor a lender be." This says that you value the friendship and you don't want to risk hurting the friendship with a loan.]

 

6. 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 considered 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 that the amount owed, based on your description, you have a good debt. If you owe more on the car than it is worth, then, you have a bad debt.

• This is exactly why it is so important to fully understand your purchase up front. We offer some suggestions on our website, www.SmartEdgeByGMAC.com , that was designed to make you a more informed consumer. Budgeting, maintaining good credit and understanding your options and choices should make your car buying experience a good one.

 

7. Is there any special way to save money for a car?

• There is no special way to save money for a car – we all do it our own 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 here is – how much do I want to withhold per paycheck. Well, if after I complete my budget, I determine that I can afford $250 per month, then, 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 also can continue to set this much aside each month, telling me that I can comfortably make the monthly car payment.

 

8. When is a co-signer on a car loan necessary? Is a co-signer on a car loan okay according to scripture?

• A co-signer may be requested for a number of reasons – the borrower has insufficient credit, insufficient income, limited work experience, some derogatory credit and/or a host of other reasons. Even if a co-signer is requested, the borrower should determine who the co-signer should be (lender can not request a specific person to co-sign).

• My son recently turned 18 and graduated from high school; he is going to college in the fall. I took him to the local bank to open a checking account and also 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 approved, unless I was willing to co-sign 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. Plus, 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 was being used to 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 payments would be made on time.

• After consideration, the loan was approved, without a co-signer with a 7% interest rate – not bad at all 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.

 

9. Should you allow a dealer to run 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 run? 

• You should not allow the dealer to run 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 also on the finance rate if you decide to finance the car.

• Whenever someone runs your credit report (called an external inquiry) this may indeed affect your credit score. If you decide to finance the car and ask the dealer to run your credit report, make sure he uses the “automotive code” since credit requests for auto loans for a 14-day period are considered one inquiry.

10. What is the difference between bank-financed and in-house or dealer-financed?  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 are then used to pay the car dealer.

• For dealership financing, which is most common, the buyer 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% GMAC finance rate that has been offered in the past. As mentioned earlier, one of the best ways to lower your rate is to simply negotiate that with your dealer or bank. Remember, the better your credit, the better your chances are for lowering your rate.