For Young Adults, a First Car Can Help Build a Strong Credit History

Importance of Vehicle Financing Highlighted by Educational Coalition AWARE

WASHINGTON - May 13, 2010: Graduation season means that many young adults will be shopping for a first "set of wheels" as part of their entry into the workforce. While reviewing different models, checking fuel economy and comparing prices and incentives, first-time car buyers shouldn't overlook one of the most important steps in the process: researching auto financing options, says Americans Well-informed on Auto Retailing Economics (AWARE).

"An understanding of the vehicle financing process is especially important for those just starting out on their own," says AWARE spokesman Eric Hoffman. "Responsible management of their monthly car payments will put them on the road towards building a positive credit history."

To help prospective car buyers navigate the financing process for the first time, AWARE offers these six tips:

1. Create a budget to help you determine how much car you can actually afford (to estimate a monthly payment for the car itself, check out the calculator at www.autofinancing101.org). Don't forget to factor in vehicle-related costs outside of the car payment, such as insurance costs. Insurance premiums for younger drivers can be significantly higher -- sometimes as much as the monthly car payment itself. Other costs to consider include gas, maintenance, parking, license and registration fees, and taxes, which can all be significant, especially if you forget to plan for them.

2. Examine your credit report. Since your credit history may affect the finance rate you are able to secure, it's a good idea to get a copy of your free credit report before heading to the dealer. You will know what creditors will see before they do, and it will give you a chance to correct any errors on your report.

3. Shop around. Do some homework before you decide which car to buy and where to buy it by visiting your bank, finance company or credit union and talking to multiple dealerships. Print out all quotes and bring them with you when you shop for the car.

4. Understand how finance rates are determined. Vehicle financers use a number of factors to determine the finance rate they will offer you. Typically, they review your credit score, which is based on an automated analysis of your credit history. Other factors that may affect the financing offer include the price and age of the vehicle you'd like to purchase, availability of manufacturer incentives, amount of your down payment, your debt repayment options, and the length of the finance contract. The rate you're offered may be negotiable.

5. Arrange for a co-signer in case you need one. A lender may require a co-signer for a number of reasons. If you're a first-time borrower with a limited or no credit history, you may need a person with well-established credit to co-sign the finance contract for you. A co-signer assumes equal responsibility for the contract, and the account history will be reflected on the co-signer's credit history as well. Before asking someone to co-sign with you, be prepared to demonstrate that you are responsible and intend to make timely payments.

6. Familiarize yourself with common financing terms such as APR, finance charge, and lien. Educate yourself on common terms, the difference between leasing and financing, and the difference between dealership financing and direct lending. Also make sure you understand the value and price of optional products such as credit insurance and guaranteed auto protection (GAP). If you don't want something, don't sign up for it. A glossary of terms is available at www.autofinancing101.org/learning_suite/AWAREGlossary.pdf.

AWARE is a vehicle financing industry effort to help consumers understand how auto financing works. The group provides potential buyers of new and used autos with the tools and resources they need to successfully navigate the auto financing process. The AWARE Web site (www.autofinancing101.org) includes materials in English and Spanish.

AWARE's members include: American Financial Services Association, National Automobile Dealers Association, National Association of Minority Automobile Dealers, American International Automobile Dealers Association, American Honda Finance Corp., American Suzuki Financial Services, AutoNation, Ford Motor Credit Company, GMAC Financial Services, Group 1 Automotive, Inc., Lithia Motors, National Auto Finance Co., Nissan Motor Acceptance Corp., Nuvell Financial Services, Saab Financial Services Corp., Sonic Automotive, Inc., Toyota Financial Services, United Auto Group, Inc., Volvo Car Finance North America and Wells Fargo Auto Finance.