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Archive for July, 2014

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Buying a new car is an exciting time. Buyers spend time thinking about what make and model they’d like, which color they will pick, and which options they will add to make their new car their own. One thing they might not have been as excited about is actually paying for that new car! If they are new to credit or has poor credit scores, they may be looking to you – a parent, sibling, friend or significant other – to co-sign their auto loan. Here’s what you need to know before you sign on the dotted line.

Risk versus reward
When you co-sign on a loan, you’re accepting all of the risk of the auto loan. The buyer will drive and use the vehicle and presumably will make monthly payments on time. These payments will offer slight benefit to your credit score, but on the flip side, missed or late payments will lower your score.

Impact on your scores
Know that how this auto loan is paid back will affect your credit score. Similarly, co-signing an auto loan may make it harder to apply for other loans you need. If you have too many loans out in your name, loans are more difficult to get. If you agree to co-sign, make sure you won’t be applying for other new lines of credit for at least 12 months.

Talk budget
Use the opportunity to ensure your excited buyer has truly thought through the complete costs of car ownership. Financial expert Suze Orman recommends taking into account all costs associated with vehicle ownership before heading to the dealership. Make sure your buyer has considered gas, insurance, maintenance and repairs in addition to the monthly car payment.

Dave Ramsey, another well-known financial expert, suggests that the sum total of all your vehicles (cars, jet skis, motorcycles, etc) should not exceed 50% of your annual income. Because vehicles depreciate at a relatively fast rate, this practice keeps a budget in check.

Get pre-approved
Research available lenders and their rates. Your local bank or credit union likely offers auto loans. This doesn’t require you to borrow from them, but does give you options and knowledge of the rate market.

Pick the right vehicle
Choosing a certified pre-owned car is an ideal way for first-time buyers to get a great value. These cars are inspected and usually have limited warranties, so you know the buyer is getting a vehicle that performs well. Knowing the car’s history also helps you more accurately plan for maintenance and repair costs.

Watch loan length
Some buyers finance vehicles for six, seven, even eight years. This puts buyers in a better place financially month-to-month, but draws the lower payments out over the long term. Orman suggests keeping loan length to three years or less to be sure you can truly afford that vehicle.

At Chapman Payson, we’re eager to help you find the right new or certified pre-owned car that fits your lifestyle and your budget!