Bad Credit Car Loan or Lease
How to buy or lease a car with bad credit
Having a bad credit history and low FICO credit score often creates problems when buying or leasing a car. People with serious credit problems frequently have very frustrating experiences when looking for car loans and leases, particularly in times of tight credit and economic stress.
Some banks and finance companies have tightened up from just a few months ago and are much more careful about doing business with "subprime" borrowers with poor credit histories. If you are having problems with making payments on your current car (see Can't Afford Your Car?), don't lose it because it'll be very difficult getting another.
However, car manufacturers and dealers are so competitive and desperate for business that they are often willing to take some extra risks to get business.
Generally, people with "subprime" credit (low credit score) should expect to pay higher interest rates, be required to make higher down payments, or make a security deposit (for leasing). They may even have problems getting auto insurance. It's good to regularly check your credit report for mistakes to make sure your data is accurate.
Analyze your credit situation first
If you have bad credit, do you know why? Do you know just how bad it is? There are varying degrees of bad credit. Some are seriously bad; some not so bad. A couple of late payments on a credit card account is not as bad as a recent bankruptcy or home foreclosure. Some problems can be quickly repaired; others take longer.
A good history of car payments can be a positive even if you have had late payments on other debts.
When you apply for a loan or lease, your car dealer and finance company will request a credit history report and credit score from one or more of the three major credit reporting agencies: Equifax , Experian, and TransUnion.
A credit history report details your past and present credit card accounts, loans, mortgages, car loans, and leases. It shows whether or not you've missed payments, made late payments, to whom, how often, and by how much. Bankruptcies and repossessions also show up.
Since car dealers and finance companies don't have time to read through credit files in detail, they typically only look at your FICO score, which is a single number that summarizes your entire credit history. Customers should always know their credit score ahead of time before being surprised by a car dealer. You can get your credit score online at web sites such as FreeCreditScore.com.
Your credit score is a measure of your credit worthiness and can range from 300 to 850. The median for consumers in the U.S. is about 720. A score above 680 or 700 is considered "prime" and will get you the best rates. If you're below about 640, you're considered "subprime" and you may have problems.
Sub-prime borrowers can expect to pay higher interest rates on loans, mortgages, and car insurance. People with credit scores in the 500's or below can expect to be refused altogether.
“ What you pay for your car loan or lease directly depends on your FICO credit score ” |
Because each credit reporting agency has slightly different data, your score from each agency is usually different, sometimes by a substantial amount. By getting all three scores, you can immediately determine if one of the agencies has errors in their data about you.
Let's make it clear: your credit history report is different from and separate from your credit score. Lenders only look at your credit score. You can see your own credit score online at services such as FreeCreditScore.com.
Shop for the best rates at lenders who specialize in "sub-prime" loans
Dealers and their associated finance companies are not your only source of loans and leases, especially for people with poor credit. You can arrange you own pre-approved loan online. In fact, if you have bad credit, most conventional lenders such as CapitalOne, Chase, Wells Fargo, and manufacturer's finance companies refer your loan request to a sub-prime lender.
One such lender is CarsDirect, who offers loans to people with less-than-perfect credit. The loan approval process is quick and easy. Although interest rates may be higher than prime rates, this can be a solution for people who might not be able to otherwise obtain a loan.
Another good online lender that specializes in financing cars for people with credit problems, past bankruptcies, or even repossessions is Auto Credit Express, one of the largest such companies in the country with a great BBB rating and customer satisfaction history.
Lease takeover might be the solution – easy and cheap
An answer for many people will be a lease takeover, known as a lease assumption, or lease transfer. You take over a car and lease payments from someone who needs to get out of their lease.
Although the lease company has to approve and check your credit, the requirements are not as strict as with a new loan or lease, and "sellers" typically offer a cash incentive with no down payment to make the deals very attractive for people who need a good way to drive a relatively new car at little or no out-of-pocket expense. Online companies such as Swapalease help match up lease "sellers" with interested "buyers." Check the Swapalease web site to find cars in your area. This can a very good answer for people who need a car but have limited finances and less-than-perfect credit.
If you can't get approved for a loan or lease
If your credit score is too low, you may not be able to get approved for a car loan or lease. In that case, your options are very limited. Let's list some of those options:
- Save cash for a "starter" car and trade up as your finances and credit improve in the future
- Borrow money – or a car – from family or friends
- Borrow money against a 401K fund or home equity (see Home Equity Loans and HELOCs)
- Find a used car being sold by an individual who is willing to take payments
- Get a loan with a co-signer, someone who will be responsible if you default on your loan
- Buy from a buy-here-pay-here used car dealer. Read this article first, "Should I Buy from a Buy-Here-Pay-Here" Dealer?"
- It's a long shot, but consider applying for a free car provided by advertising agencies (see Free Cars - Fact or Fiction?)
Build (or rebuild) a good credit history
Creating a good credit history for the first time, or rebuilding after a credit disaster, can be accomplished by some or all of the following steps:
- Pay down your largest credit card balances so that there is a large difference between your balance and the card limit
- Don't close credit card accounts you don't use. The open credit limits on those cards help your credit score.
- Open a few new credit card accounts, but not all at the same time. Use them occasionally, pay off the balance each month.
- Open department store and gas card accounts. Use them but keep balances at zero or low.
- For people with seriously damaged credit, get a secured credit card. Secured credit cards are available from large national banks such as JPMorgan Chase. You'll have to make a security deposit first but it's not a debit card. It works like a normal credit card and can help restore your credit.
- Get a small personal loan from a local bank or credit union. Interest rates may be high but if you pay it off relatively quickly, total finance charges will not be significant.
- Get a car loan and use a co-signer. Using a co-signer allows you to get relatively low rates and helps you build your own credit.
- Pay all bills on time. Don't be late and don't miss payments. A single late payment can be very damaging
- Don't allow a car loan default and repossession. It seriously damages your credit for seven years.
- Keep checking your credit score often, or use a service that monitors your score, such as FreeCreditScore.com
, and alerts you by email when it changes, for the better or the worse.
Summary
Buying a car, or leasing a car, with bad credit is not easy. But it's not impossible. It requires some careful shopping to find a good lender and get the lowest rates. It also requires some self-discipline to make sure the bad credit situation isn't made worst but, in fact, gets better.
If you are having problems with your current car loan or lease payments, see our article, Can't Afford Your Car Loan or Lease?
For more, see our related article, Your Credit Score, How Important Is It? Also see, Credit Problems and Car Leasing.
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