Buying an Automobile with Shaky Credit

Getting a fair financial deal is a daunting task for those without a good credit rating. There are many potential traps. Let’s start by pointing out the number one trap:

Never accept delivery of an automobile before the financing is complete. Dealers are notorious for completing the sale while the finance company is still reviewing the transaction. If the finance company comes back and will only approve the consumer at a higher interest rate, guess who is stuck.

THE PROCESS IN APPLYING FOR FINANCING

When applying for a loan, you will complete an application, which will be processed through computer analysis. Once the analysis is complete, you will receive a credit rating that will influence the interest rate offered by the dealer. The finance company charges higher interest rates for deals they determine to be credit risks.

Be aware that you do not have to finance through the dealership. Dealer financing often has hidden costs. Consumers are more in control with financing arranged through their bank.

When applying for a loan, you will complete an application, which will be processed through computer analysis. Once the analysis is complete, you will receive a credit rating that will influence the interest rate offered by the dealer. The finance company charges higher interest rates for deals they determine to be credit risks.

Be aware that you do not have to finance through the dealership. Dealer financing often has hidden costs. Consumers are more in control with financing arranged through their bank.

SUB-PRIME RATES

Car dealerships tout "no money down, no payment until a certain date." This is a slogan to get you in the door. If your credit rating is deemed risky, your credit application is sent to a sub-prime rate financing company. The interest rate for these companies can go higher than 25%.

• Even major dealerships such as Ford and GMC have sub-prime lenders.
• The dealership refers "poor credit risks" to these lenders.
• Experts advise paying such exorbitant interest rates only when there is no reasonable alternative - and then do not overextend - stay with an inexpensive model.
• Having a financially stable cosigner reduces the interest rates.

BUY HERE / PAY HERE

Another situation to be aware of is a "Buy Here / Pay Here" car lot. The terms may appear attractive. A typical deal is "$100 down, $30 a week for 3 years." The car lot owners encourage the weekly payment and enforce penalties when the payment is late.

Many of the cars on such a lot are cars unloaded by reputable dealers because of the "lemon law." If a new car has multiple problems that are not resolved within specified time limits, lemon laws force dealers to retake possession of the automobile. Many of these cars end up on "Buy Here / Pay Here" lots.

A consumer may think that they can simply quit paying the $30 a week. However, these companies prosper by turning over the loan to a collection agency. Collection agencies are very forceful and use threats of further financial difficulties to achieve their goals.

• Experts discourage purchasing from these lots.
• These lots prey upon people who have difficulty with the English language and who are unaware of their rights under the law.

OPTIONS

• Utilize mass transit if your area is urbanized and this is available.
• When obtaining any loan, always check fees and charges associated with the loan.
• Shop around for the best interest rates. Do not forget to check credit unions.
• If the interest rate is high, hesitate to buy the car in the hope to receive a better deal.
• Always check with the Better Business Bureau to know the reputation of the company.

Consider purchasing a car from an individual. Check the newspaper listings to find an affordable used car. One benefit is not paying sales tax. Two negatives are: 1. there is no recourse if the car has mechanical problems and 2. you must arrange your own financing.

Know the value of a used car. A guide to knowing the value an automobile is the Kelley Blue Book (http://www.kelleybluebook.com/).

• Driving an older, reliable automobile is much preferable to paying high interest rates or purchasing a "problem" car.
• Go to a bank or credit union to know the amount of financing you can obtain to purchase a car. Be sure to carry two forms of identification and any documentation to indicate you are not a credit risk (steady employment as well as paying rent and utilities on time). Once again, a financially stronger cosigner may reduce interest rates and make a loan easier to close on favorable terms.
• Consider delaying the purchase of a car until your credit improves, if possible.

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