Credit is a huge responsibility, but when it is used correctly, it establishes you as a credit-worthy consumer. Even if you have been irresponsible in the past, you can boost your credit worthiness, and an automobile loan can help. Here are some tips on how to use the loan to your benefit .
Credit Is a Privilege Not a Necessity
The above being said, you should always bear in mind that credit isn’t a necessity. You should never rely on it for your needs. Credit is a luxury; it allows you to secure things without upfront cash, but you still pay for these things in the end – and then some. Your salary is your necessity; it gives you the money you need for your life’s expenses. Credit is the icing on the cake to your financial portfolio.
You shouldn’t take out a ton of credit cards and loans if you cannot afford to pay them back. In fact, if you overextend your credit, i.e. you have more debt than income, you will affect your credit score negatively instead of positively. Even though it’s tempting to use credit to get your hands on things you want, you cannot abuse the privilege. Consider it aside from your income – always.
Budget for it Wisely
When you prepare to use credit it’s important to take many steps prior to any transaction, especially if you want to use it to boost your overall score. When you use it to purchase a vehicle, there is much more involved than stepping onto a lot or going online to virtual shop. You must make certain you can afford to pay off your auto loan without fail. If you can’t do this, you’ll ruin your credit.
Sit down and look at your household budget with a very realistic eye. In fact, pretend you’re an accountant and audit your finances thoroughly. How much money do you bring home each month – net, not gross. What are your household expenses? What are your necessary expenses? How much money do you want to have leftover each month for entertainment? Count every penny.
In addition, how much money do you have saved? Do you have enough money for any emergency? Is there any significant life change in your future, such as a wedding or divorce? Will you have enough money when you retire? All of this is crucial for your financial health, so don’t take shortcuts. Once you have the raw numbers, you can see how much you have leftover for a car loan.
It Isn’t Just Loan Payments, Though…
You can’t simply figure you’ll need $300 a month leftover in your budget for your car or truck payment. You also need insurance, annual registration fees, maintenance costs, and money in the event the car breaks down unexpectedly. If you purchase a fuel car, you’ll need to calculate how much a month you’ll need for gas, and you’ll also need to account for the current instability of the fuel market.
If you buy hybrid or electric, you’ll need to account for your additional electrical expenses. Ask yourself how much your car or truck will cost you to operate each month, and then make certain you have enough in your budget to cover those expenses, too. It’s expensive to finance and operate a vehicle, especially if you use credit to purchase one. Why? Keep reading.
Your Automobile Loan
When you finance your new vehicle, you finance the sticker price, interest, and dealer overhead. The dealer automatically makes money off the MSRP; this isn’t what it cost the dealer to purchase the car from the manufacturer. The MSRP includes the dealer’s overhead. The finance company makes money off loan interest, which means you’ll pay more than the MSRP over time.
It’s crucial you understand everything that makes up your automobile loan because the loan itself will be logged on your credit report monthly. Provided you make your payments on time, your credit score will rise (barring any other credit irresponsibility). If you cannot make your payments on time, your credit score will lower. You can learn more here about automobile financing.
You can use an auto loan to boost your credit score and creditworthiness, but you won’t succeed if you don’t use it wisely. Make certain you can afford to buy a new or use car or truck in the first place. If you can, make certain you understand your loan and can pay it off easily.