If you have any negative marks on your credit such as a late payment, default, repossession, foreclosure, lien, judgment or bankruptcy you probably think you’ll have a hard time buying a car (or truck or van). Think again. There are many options available to you, but you’ve got to understand the advantages and disadvantages of each.
Consider the following:
- You can buy a car using the dealer’s financing.
- You can buy a car using an alternative source of financing.
- You can pay cash for a car.
- You can lease a car.
Before You Start Looking
Unless you plan to pay cash for your vehicle, get your ducks lined up before you go shopping for either the vehicle or your loan. If you have poor credit, you will want to have on hand the following:
- A copy of a recent pay stub
- A statement from your employer verifying your employment and income
- The names and addresses, and the account numbers, of your creditors, including your mortgage lender, student loan holder and credit card issuers
- The bank name and address, and the account numbers, of your checking, savings and money market accounts, and
- A copy of your credit report be sure you know what’s in your credit report, as anyone to whom you apply for financing will pull a copy.
Also, take some time to figure out how much you can afford to pay each month. Total up your monthly expenses including your rent or mortgage, utilities, food, clothing, transportation, education, insurance, taxes, loans, savings and subtract that number from your monthly income. What’s left over is the maximum you have to put toward monthly car payments.
Buy a Car Using the Dealer’s Financing
Most people want to be able to walk into a showroom, pick out a car, sign a few papers in the back and drive away. But does “most people” include the folks with bad credit? And even if it does, is that the best way to go about buying a car?
Maybe. Car dealers want to move the vehicles on their lots to make room for new ones so they advertise heavily. Open a newspaper or turn on a television and you’ll see ads screaming low financing, such as 1.9 percent. These ads are often aimed at people with low income or poor credit who can’t afford high priced deals. They probably sound like a bargain, especially if you are paying 20 percent on a credit card. But ironically, low financing doesn’t always come cheap. Before applying for a low-rate loan, answer the following questions:
- Are you being charged a higher price to qualify for the low rate than you would be charged if you paid cash or used an alternative financing source?
- Are you required to make a larger-than-usual down payment, such as 25 percent or 30 percent? This is often required of a person with poor credit.
- Will you be required to make a balloon payment possibly for several thousands of dollars at the end of the loan period?
- Is the loan limited to a set number of months, such as 24 or 36? Many more traditional car loans give you up to 60 months to pay for the vehicle.
- Must you buy special services or merchandise, such as an extended warranty, credit insurance or rustproofing, to qualify for the loan?
If the loan seems unfavorable, ask the dealer about more traditional financing at a higher rate but with fewer restrictions. Because of your credit history, you may be required to make a larger-than-usual down payment, or you may be asked to provide a co-signer, a person who agrees to make the payments if you default. If you go with dealer financing, read the contract carefully. Make sure you understand all terms and that they reflect the agreement you made with the dealer. Don’t sign if you don’t understand or agree with any item in the contract.
Buy a New Car Using Alternative Financing
A car dealer may lead you to believe that he’s your only source of financing. Nonsense. All financial institutions banks, savings and loans and credit unions make car loans. While these loans aren’t as low as the low rate dealer financing loans, especially for used cars, they don’t have the hidden charges. If you have a long-term relationship with one particular financial institution, consider applying there first. If you’ve never bounced checks or defaulted on a loan, you might be pleasantly surprised that you qualify for a loan, even with marks on your credit report. Alternatively, the financial institution may require a large down payment or a co-signer. If you can’t afford the large down payment or don’t want to use a co-signer, try proposing either of the following:
- That the interest rate begin at a point higher than the financial institution initially offers you, if the institution agrees to reduce it to that rate after you make six consecutive payments.
- That you will maintain a minimum balance in a savings account that the institution can use as a setoff that is, to take money from the account to apply toward the amount of any missed loan payments.
Another alternative source of financing doesn’t involve a financial institution consider friends or relatives.
Propose a written business deal. Ask to borrow the money at a rate less than you’d pay a bank but more than your friend would earn on her money in a savings or money market account. For example, if the bank would charge you seven percent, but you would pay your friend Mavis only three percent on her savings deposit, ask Mavis to lend you the money to buy the car, and offer to pay her five percent a good deal for you both.
Pay Cash for a Car
If your credit is very bad, you can’t afford a large down payment, you don’t have a cosigner, or no one will give you a loan for any other (non discriminatory) reason, you will have to change your expectations if you want to buy a car. You need to save up money to pay cash. This will require discipline.
Your first step will be to trim your expenses as much as possible so that you’ll have a little bit left over each month to put aside.
To get a handle on where your money goes, you could also take a month to make lists of every outlay of cash or cash equivalent, such as check or ATM card, used to make purchases. At the end of the month, look carefully at your lists. Chances are you’ll find places where you are spending money unnecessarily for example, bringing your lunch to work rather than going out, even going out cheap, will save you a bundle each week. So will using the public library to read the daily paper or to take out books, CDs and videos instead of buying or renting. Look for other ways to save.
Your second step is to look for things around the house you can sell, such as sports equipment, electronics, large appliances and anything else that’s just taking up space. Let your friends and co-workers know what you have, hold a garage sale or run an ad in the local freebie paper.
Granted, raising money to pay cash may not be your first or even second choice in buying a car, but it will teach you discipline. And you can use the same technique to save up your money so that you can apply for a secured credit card and begin to rebuild your credit. And imagine how it will help you when you go to raise money to buy a house.
Lease a Car
The number of people leasing cars has skyrocketed for a very good reason leases can seem cheap. Lease agreements usually require a low or no down payment, and lease payments are usually lower than loan payments for the same vehicle. This means that people with poor credit may have an easier time qualifying for a lease than for a loan.
But leasing is rarely a good option. First, you don’t own the car, you are renting it. You are paying to drive someone else’s vehicle. If you want to own a car at the lease end, you will have the pay a bundle for it far more than the vehicle is worth. Your alternative is to enter into a new lease for a different vehicle, meaning that you make perpetual car payments.
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If you’re still lured into a lease, read the fine print carefully. Be sure you understand all of the following:
- Whether the lease is open-end or closed-end. In an open-end lease, you must pay the difference between the value stated in your contract and the vehicle’s appraised value when you return the vehicle. A close-end lease allows you to walk away, but you may be responsible for certain charges.
- Closed-end lease charges, such as excess mileage (you’re usually limited to 12,000 to 15,000 a year), abnormal wear and tear (is a “ding” normal or not?) and the disposition of the vehicle.
- The price if you were to exercise your option to purchase the car either at the lease end or earlier.
- Lease inception fees, such as a low down payment, security deposit, acquisition fee, first month’s payment, taxes and title fees.
- Charges for terminating the lease early. These are usually very high and often hard to understand, based on a complex formula. Be sure you know exactly how the fee for terminating the lease early is calculated.
- The warranty coverage it should cover the entire lease term and the number of miles you’re likely to drive.
- The availability of gap insurance to cover the difference between what you owe under the lease agreement and what the car is worth if it’s stolen or totaled in an accident. The difference can be many thousands of dollars.
So, what are the lessons here?
First, don’t assume that marks on your credit report will keep you from getting a new car.
Second, do your homework in advance present yourself in the best possible light and be upfront about your problems.
Third, shop around. Remember that car dealers are in the business of selling and lenders are in the business of making loans. They don’t make money by saying no.
And finally, beware of deals that seem too good to be true. Read the fine print. If the offer is questionable, pass it up.
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