Ask YOUNG MONEY: How can I get a car loan with just an average credit score?
Q: I need a new car! Right now, I will take a used car! Currently, I have a 1995 Dodge Neon which is giving me problems. The problem is as a college student with a credit score in the 630-650 range and a monthly income at best $1,000-$1,300 range with credit card debt and a total minimum payment of $25 a month...financing is a problem. I don't know where to turn or what to do!!!!
A: "First things first."
Do you need a new car? As a college student, can you survive until graduation using public transportation, a bicycle, walking, and getting rides with friends and using your current car only when absolutely necessary to save on wear and tear? As a student, the last thing I'd want to see you do financially, especially on a relatively low income, is to get locked into a car loan or lease for 5 years or more.
If you decide that you must purchase another vehicle, you first need to understand why your credit score is down between 630 and 650 - not bad - but not great either. Have you had some negatives like late payments reported on your credit reports?
I suggest you go to annualcreditreport.com and get copies of your three credit bureaus for free if you have not seen them in a while. We will also send you a free copy of our new book, "CreditBooster: Ultimate Guide to a Better Credit Score," which will help you understand what your credit reports are saying about you and give you easy to follow action steps to begin to improve your credit score right away.
You mentioned that you have some credit card debt but don't say how much. You did mention your payment was $25 a month which looks to me like you are just paying a minimum payment. How much debt do you have compared to your available balance? If you are using more than 50% of your available balance, that is hurting your credit score.
It is hard for me to recommend that you get yourself into a car loan with a maximum of $1300 per month income, especially without knowing all of your other expenses. Your auto expenses should be no more than $130 per month on your level of income and that includes the monthly payment, insurance, gasoline and other maintenance costs. So you don't have much to work with. Can you increase your income by $300 per month ($70 per week - which is 10 hours a week at a part-time job paying $7 per hour) to pay for the cost of a car loan or lease? If you could do that I would feel better about you moving into a newer car.
Lastly, I urge you to create a Spending Plan. On a piece of paper, list your income and detailed expenses by month for the next 12 months. A Spending Plan will help you understand where all your income is going and give you ideas on how to best manage that income to pay off your debts more quickly and also help you afford the things you need or want in life, including a new car.
Keep us posted on your progress and thank you for your email.
Mike Schiano "The DebtBuster"
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