A Step-By-Step Tutorial: How to buy a car with bad credit without it turning into a nightmare.
Are you tired of hearing the word
'No'
when it comes to a car loan? I set up 'How to buy a car with bad
credit' specifically so that you could hear the words 'yes'. Who am I,
you ask?
I spent 14 years in the automobile business as a Finance
Manager so I believe it's fair to say that I know a thing or two about
getting a loan financed, irregardless of your past credit history.
Remember,
regardless of your past credit history, you still need a car, want a
car and most of all, you deserve a car. You should also be treated with
respect and given choices. I'm going to teach you how to have a choice
with auto bad credit financing loan.
First of all, all lenders now
purchase deals based on what is called a beacon score, which is the
same as your credit score. There are three credit bureaus that make up
the package. Each lender will choose whichever credit bureau(s) they
prefer when looking at your credit or a combination of bureaus.
I
highly advise everyone to have all three credit bureaus pulled when
checking your credit and to pay for the credit score. If you only look
at one bureau, you're only seeing part of the whole picture.
With
the exception of a few minor things, beacon score will play a large part
in your approval. Staying within your financial means is another, so be
realistic. If you make $2500 per month and have $1200 going out, don't
walk in all high-and-mighty and tell the Finance Manager that you will
only have an Expedition or nothing. You'll end up with nothing.
In
order to effectively use auto bad credit financing, you are going to
have to know what your credit looks like and what your credit score
actually is. Otherwise, you are working in the dark.
Pay for the credit score or it's just almost useless. With the
credit score, you will know whether or not you qualify for a lender such
as Ford. Also, the higher the score, the lower the interest rate. Got
it? With an auto bad credit loan, the higher the beacon score, the
better.
Let me explain websites like cars.com and the such: They
collect applications for car loans online. They then have a network of
dealerships that PAY them for the leads. These are generally dealerships
that have departments that specialize in getting you financed,
regardless of your credit. These departments pay for these leads, so
most take them very seriously, as they are their bread-and-butter, so to
speak.
If you have a lower than usual credit score, a current
repo or just plain, all-around bad credit, this might be the way to go.
If your credit is really that bad, remember that you are going to need
some cash or a paid-for trade in that's actually worth something.
O.K.,
now for the step-by-step system that I promised. First, take control of
your car deal! You need to be in the driver's seat, if at all possible.
Go online and run a copy of a tri-merge, which is all three credit
bureaus, plus pay for your credit score. You can get a FREE copy of your
credit report once per year HERE:
http://www.annualcreditreport.com
This
is the new Federal law that actually entitles you to receive a FREE
copy of your credit bureau once per year and with some other exceptions.
This is not a credit monitoring site. You have to run each bureau
separately; Experian, Equifax and TransUnion. Then, you have to pay for
the credit score.
So as to hold down on confusion, here's the
scoop: Each credit score for each separate bureau will be different.
That's why a Tri-Merge is called what it is called. You can run a
specific bureau called a Tri-Merge from one company (there are many-just
do a Google search) and you actually get one bureau (it's actually all
three combined but the credit score is also one credit score). It's more
expensive and generally runs around $34.00 but it just depends on your
preference.
Now, with your credit score in hand and a copy(s) of
your credit bureau, look at your credit. Do you have anything strange on
there that is not yours? If so, it's time to fix it. You should review
your credit bureau at least every 6 months to a year. Plus, if your
identity has been stolen, you will know quickly. P.S. you can also have a
liner placed on the bottom of your bureau that simply states "Do not
extend any credit on my behalf without contacting me first. Work #
(111)222-3333 Home#(222)333-4444 Cell# (333)444-5555." Call or write
the credit bureaus and request that this is done. You can now do this
online for free. Again, do a Google search for all three bureaus listed
above.
How do you fix your credit, you ask? I give away a totally
FREE book that I wrote on the subject simply for the asking. Email me
with Free Credit Repair Book in the headline and I'll email it to you.
Next
in line: Know what you want to buy BEFORE you even go out shopping! Let
me make this very clear. Car dealer's jobs are to sell you a car on
your very first visit. A salesman/woman and their sales manager believe
that if you walk into their dealership and do not leave with a car, you
will never come back again. They are going to hammer on you until they
either A) Make you mad and you get up and leave or B) Sell you a car.
It's the nature of the beast. Accept it ahead of time.
What do you
want to buy? Where can you get unbiased information on the auto? Again,
Google for Kelley Blue Book or NADA and you can get cost, warranty
repairs, recalls, and information on problems and tons of info
beforehand. Limit your shopping to three models. Keep it simple. Those
will be the ones that you will shop for.
Can you afford the car?
You may think you can afford the car, but the bank may think otherwise! I
have seen this so many times in my career.
Automobile economics 101:
Take your gross income (what you make per year BEFORE Uncle Sam taxes
you) and remember, this income needs to be provable-tax returns, check
stubs with taxes taken out or a W-2. If you are self-employed, you will
need two years of tax returns with Schedule C's. This is the income that
you actually paid taxes on. Being self-employed can be tough. You may
need to combine a spouse's income if you are self-employed.
Now
with your gross income figured out, find out what all of your debts are
that are going out each month. Include everything...it's listed on your
credit bureau's. Example: Car note=$450.00 + House note= $560.00 +
Credit card debt= $425.00
Boat note= $310.00 Charge-offs=$1200.00 (yes, charge-offs; these
are bills that you never paid and they were written off). Add all of
your debts up. With just your obvious debts (including the charge-offs),
you have $1805.00 per month going out. I arrived at that figure by
adding up all the monthly notes and taking 5% of the charge-offs. 5% of
$1200.00 = $60.00. We're not through, though. Now we have to figure in
cost of living-utilities. Each lender has their own algorithm for
utilities but a good range to estimate would be to add $300.00. Now we
have a total outgo of $2105.00. This is what you have to have to pay
your current bills before you take on any other debt.
Almost all
lenders will not allow your new car note to exceed 20% of your current
income. For our example, let's assume that your gross income is $5300.00
per month. Let's take $5300.00 and subtract your debts, which are
$2105.00. That leaves you with $3195.00. To make it easy, take $2105.00
and double it. That would be $4210.00. That would leave you with
disposable income of $1090.00. What the lender is looking at here is
referred to as debt-to-income. They want to know if you have more going
out than you can handle. This is strictly a case of numbers and provable
numbers. If your gross income was $4500.00 and you had $2105.00 in
debts each month, you need to be prepared for one of two things; add
your spouse's income and your spouse to the deal or trade in the other
auto. If your debt-to-income is running too close to 50%, you're going
to have a hard time getting a loan for anything. Make sense? The way the
bank looks at it is this: you can't afford both cars so they assume
that you are going to let the other (older) car go back to the
lender-repossession. That's their take. Debt-to-income is a HUGE deal.
In
this case, your disposable leftover income is $1090.00. 20% of that
would be $1060.00. Whoa! Let me be the first to inform you that you are
NOT getting a car payment of $1060.00! Why? Well, you only have $1090.00
left over for starters. Let's be realistic here. Most lenders will
slice that in half which will equal $530.00. Your payment call should be
around that figure, give or take a few dollars.
How expensive of a
car can I buy on a $530.00 payment? Good question and one that you
absolutely need to know so that you can pick out the correct car. One
answer depends on the term of the loan. You can finance for 36, 48, 60
or 72 months, as a for-instance. That equates to 3 years, 4 years, 5
years and 6 years. I will tell you this: the worst thing you can do is
extend the note out the longest amount of time in order to get the
payment where you can afford it. That creates a syndrome that now
affects over 75% of car owners called being "Upside Down." It means that
you owe more on your car than it's worth. It also means that you need
more money down when you go to trade it in. The only way around that is a
lot of money down or a short-term loan.
You can again do a Google
search for a 'car loan calculator'. You will punch in the loan amount
you want to borrow, the term (48,60, etc.) and the interest rate. If you
have not gotten approved already and know the rate, you will have to
guesstimate. Here's a rule of thumb for you-it's not an exact science
without knowing your credit, but it is a guide you can follow to get you
close. Let's base the rate on your beacon score: that's what most of
the lenders are going to look at.
If your beacon (credit score) is
in the 400 or lower range, you will need to figure your interest rate
on a new car at 21% (state maximums differ-it could be 18%). If you are
looking at a used car, figure on 33%. If your beacon score is in the low
500 range, figure your new car loan as you would for the
above-mentioned 400 beacon. If your beacon score is in the mid to high
500-range, figure a new car at 18% and a used car at 27%. If you have a
beacon of 600 to 649, figure a new car at 16% and a used car at 20%. If
you have a beacon score of 650 to 699, figure a new car rate at 12% and a
used car rate at 16%. I may be hitting too high on a few of these, but I
live in a state that has the highest rates in the nation. Better safe
than sorry.
Get Pre-Approved
BEFORE you start shopping.
This is the easy part, in a way. Remember I told you at the beginning of
this article to take charge of your car deal instead of letting the
dealer lead you by the hand. It all boils down to financing. If you can
walk in with a check in your hand, you are in control. I will recommend a
few companies that are reputable, have a proven track record in sub
prime loans and all mail the check to you at home. You then go into a
dealership and pick out your vehicle, negotiate and buy like a cash
buyer! These companies are Household Finance, Capital One Finance,
Americredit and E-Loan. You can do a Google search for all four, apply
online, and get either an instant approval or one really quickly. When
you are approved, they mail the contract to you and then the check. It's
that easy.
On the final decision for the car-work smart here.
There is nothing more valuable than time and nothing more rewarding than
piece of mind. Please don't go running from dealership to dealership.
Wrong. Pick out the 3 models of auto that you can afford. If you are
looking for a program car (rental), call dealerships and inquire as to
whether or not they have any. If you want a new, ask other people that
are driving that model where they bought theirs and would they purchase
there again. If you start hearing a lot of "I'll never buy from them
again", move on. Something is wrong. Your new car is only as good as the
service you will get AFTER the sale.
Negotiating-Most people hate
this. I have only met 2 people in 14 years that enjoyed it; they were
both retired and had nothing better to do. One did it for the fun of it
and never even bought if you agreed to his price. Don't waste other
people's time. If you don't like the car, don't negotiate on it. When
you do find a car that you would own, tell the salesman you'd buy it
right then if the price was right and if they provided you with a Car
Fax. The keyword here is: 'If the price is right'. How do you know what a
good price is? Well...glad you asked. If it's a new car, Kelley Blue
Book will have dealer cost. Go to:
http://www.kbb.com
If it's a used car, compare used car figures at
http://www.kbb.com
And
[http://www.nadaguides.com]
What's the difference? Most dealers (with the exception of the West coast) will use NADA as their guide.
Here's what's transpired so far:
Before
you ever drove the car, you went by the dealership on Sunday, when
there are no salespeople and you got the Vin# of the car and the
equipment, year model and had a good look at it. You already know if you
like the car when you drive it, that you would buy it. The list price
is in your pre-approved check category, to boot. You've already gone
online and gotten wholesale, trade-in and retail values for the car.
Retail
is what the dealer should ask for the car. This will help you to know
whether or not the salesman is trying to add money to the car, or if the
dealership is. Trade-in is a figure to gauge approximately what the
dealership traded for the car for. It will give you an idea of what the
dealer paid for the car, before reconditioning fees and any ticket from
service. Now, not every make of car will bring trade-in value. Two that
will at this time are a Honda and a Toyota. Those cars will bring
trade-in value. Domestic cars generally will not bring trade-in value,
with the exception of new, hot models. Other models will only bring
wholesale. As an example, Kia makes a great car, but most will not bring
close to trade-in value. Mitsubishi is going through changes and also
won't bring close to trade-in value. There are exceptions to the rule:
Katrina and Rita-two hurricanes that created a short supply of used
cars. If you live in the south, that will be the case for a while. With
the exception of a Honda and a Toyota, you can probably be safe offering
less than trade-in. Not thousands, mind you, but less.
Take into
consideration the other costs of trading for a car. Also, ask the
salesperson how long they've had the car. If the salesperson slips up
and tells you they've had it a while, your negotiating should be easier.
The reason behind that is that the dealer is paying interest on the car
every month it does not sell. The book value is also dropping every
month so it needs to go.
Throughout the car deal, make sure they
know you are paying cash. Don't mention that you have a check from
Americredit or whoever. That's none of their business. When you make a
deal, insist on the Used Car Manager running a Car Fax before you sign
any paperwork. A Car Fax will show if the vehicle has been involved in a
serious wreck, was bought back from the original customer or is
salvaged. This will put your mind at ease. If you don't like the Car
Fax, don't buy the car.
Throughout your shopping, I can't stress this enough-Do
NOT
fill out credit applications at each dealership. Every time you sign a
credit application, the dealer pulls your credit report and your beacon
score goes DOWN. That's why I advise on getting approved ahead of time.
There are numerous advantages to getting approved ahead of time. The
main advantage is that you are in control, not the dealership. That's
worth a fortune in itself. Their job is to take control of you from the
start of every meeting. Believe me; I know what I'm telling you. I lived
that life for a long time.
For some reason, should you not be
able to get pre-approved because your credit is extremely bad (a
discharged bankruptcy is an instant-approval, by the way), and you have
to go through an online clearinghouse like cars.com, don't despair.
Continue to follow my previous steps and advice and negotiate and insist
on a Car Fax report.
When you do decide on a car and go into the
Finance Office to sign the papers, I would like for everyone to know
that you do not have to purchase any products in order to get the loan.
If anyone in Finance tells you that you have to purchase a warranty and
credit life to get the loan, which is a bold-faced lie. Why would a
Finance Manager do that? Because they work on commission, also.
Surprised? Don't be. That's the way dealers set up Finance Offices from
the start when they realized how much money could be made. The Finance
Manager makes money off of the rate they quote you, the warranty they
sell you, the gap insurance and the credit life and disability you buy.
That's how they make a living.
I'm not saying that any of these
products are bad, though. I believe in extended warranties. I'm just
telling you to shop around first. If you find a cheap warranty, check
out the company and make sure they will give the dealer a credit card
over the phone immediately when in need of repairs in any state. All in
all, I will say this-A manufacturers warranty is always better than an
after-market warranty. Always. Just negotiate on it if you want it.
The
only reason why you would not want gap insurance would be if you
literally paid cash for the car. Otherwise, gap is cheap (should retail
around $495) and will pay the portion that insurance won't pay if it's
totaled. Just remember what I said about the book dropping on a car
every month. It will never be worth what you owe unless you put down a
lot of money at the time of purchase.
Credit life and Disability
insurance are a personal matter. If you have a life insurance policy, it
can be used to pay off the car in the event of your death. If you are
single, why do you need Credit Life? The only benefit would be if you
are married with a family, it cuts down the payout time. In this
situation, your spouse would not lose the car.
Disability
Insurance pays out for a specified amount of time. It will not pay out
for the entirety of the loan. It also has a specified start date from
the time you are disabled. It doesn't just kick in immediately.
This
is a lengthy article, but the gist of it is this: do your homework at
home first. Then get approved online. Then shop on Sunday. Then go get
your car and negotiate on everything. It will be the easiest car-buying
experience you have ever had.
Regardless of your credit situation,
if you follow my steps, you'll have a car in no time and you'll be an
educated and informed customer during the process. Good luck!
Alicia Guidry spent 14 years in the retail automobile industry as a finance manager, sales manager and general sales manager.
For additional sources, see:
Bad Credit Car Loan [http://bad-credit-card-applications.com/auto-bad-credit-financing-loan.html]
