Buying a car with bad credit

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Knowing your credit score before you walk into a dealership can help avoid expensive subprime car loans.

Greetings from The Hemet Car Guy,

Recently my wife and I purchased a new bedroom set for zero cash down and no interest if paid off before 40 months because we have excellent credit. For the times we need to use credit, it’s nice to know we get the best rate and terms available.
Some people have downright bad credit, but that doesn’t mean you can’t buy a car, nor does it mean that the terms of the loan will put you in the poorhouse.
Like everything else, “bad” is a matter of opinion and degree. If an applicant’s FICO score is borderline, some lenders might still see a good prospect, while others see more risk.
While lenders typically charge higher interest rates to subprime borrowers, it’s important to do some online research and not accept the first rate that’s offered. When I’m working for a client who wants a car and has credit challenges, I shop around on my computer, and so should you.

File Photo
Richard Perry

Know your credit score
Don’t take someone else’s word that your credit is bad. Check for yourself by getting your credit report and credit score. According to the Federal Trade Commission, everyone is entitled to a free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. You can get them at annualcreditreport.com or by calling 877-322-8228. Identity verification is required.
As an experienced finance manager, I know that two people with an identical score might not be the same in the eyes of a lender. Even if your score is low, you may have a better chance than someone with the same score and no credit history. As one example, I’ve seen someone with a good score of 710 who couldn’t get approved for a car loan of more than $10,000 because their only credit was a Pep Boys store credit card with a maximum of $200, opened two months prior. And I’ve had clients approved for more than $20,000 with a 550 FICO score, because they had stable income, paid off previous car loans in a timely manner and had a good reason for past credit problems.
It’s important to remember that car loans involve less money over a shorter period of time. It’s also easier to repossess a car than a home, so the same credit score that might have put you in a subprime mortgage loan could bring you a prime or near-prime auto loan.
If you have good credit, don’t apply for a subprime loan. Some smaller startup used car dealers only deal with subprime lenders, which means it’s more likely you’ll be offered less favorable terms than you deserve just because of the dealer’s limited choices. Be careful of a lender or car lot that caters specifically to subprime consumers – that’s a warning sign.
If you have a challenged credit history, take steps to make yourself look better on paper. Examine your credit report and clean it up if you can. Be prepared to explain any negative reports to the lender.

Photo by Mary Ann Morris / TVC
While a high FICO score is optimal, don’t let a low credit score deter you from applying for a vehicle loan. Other factors, such as payment reliability and honestly explaining your credit problems, can help mitigate a low score.

Apply at your own bank or credit union
Even if you don’t think you can get a loan, apply at the bank or credit union where you have a checking account. Ask if your employer or insurance company offers auto financing. It’s always better to walk into a dealership knowing what you can afford and how much it will cost you.
Look for the cheapest money — the lowest annual percentage rate over the shortest period of time. Don’t be sidetracked by promises of a lower monthly payment over a longer period of time.
Also, never allow the loan to be contingent on purchasing add-ons, such as extended warranties, after-market services and even insurance. If you see the value and want these extras, fine, but don’t be forced into purchasing them. If a dealership will only offer you the vehicle loan if you insure it with them, walk away.
If you decide to finance through a dealer, that’s OK too, just know your terms. Many dealers will allow you to take delivery of the vehicle before you are 100 percent approved, based on the information provided on your signed application. At times, proof of income, residence and other stipulations are needed to fund the loan. Keep in mind that if you provided the documentation the dealership asked for, it delivers the car to you and later calls to say that they can’t get you approved, you can return the car and get all of your down payment refunded…just think of it as a long test drive.

Hope this helps, and good driving

The Hemet Car Guy

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