Bad
Credit Car Loan or Lease
What
does it mean to buy or lease a car when you have credit problems?
Having a bad credit
history and low FICO 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.
Some banks and finance
companies have tightened up a bit from a couple of years ago and are much
more careful about doing business with customers with poor credit histories.
However, many car
manufacturers and dealers have become so competitive that they are often
willing to take some extra risks to get business. The financial companies
associated with car manufacturers, such as Ford Motor Credit and GMAC,
are better able to take losses than banks and credit unions.
This does not mean,
however, that everything is rosy for those with poor credit. Generally,
people with "subprime" credit 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
best to repair your credit report by correcting mistakes and improving
your on-time payment history.
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.
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.
The 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. It details balances on all outstanding
accounts, credit limits, and shows how many inquiries have been made recently
by lenders.
Since car dealers
and finance companies don't have time to read through credit histories
in detail, they also ask for your FICO
Score  ,
which is a single number that summarizes your entire credit history.
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 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.
Subprime 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 loan and credit
card refusals, and even job rejections.
“
What you pay for your car loan or lease directly depends on your
FICO credit score from all three credit agencies ” |
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The best source of
credit history reports and scores is from the Fair
Isaac Corp ,
the company that is behind the scores from all three credit reporting
companies. Because each credit reporting agency has slightly
different data, your score from each agency is 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.
If you ask for your
credit history, be sure you also get your FICO credit score, which is
not automatically provided.
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 DriverLoans
 ,
that specializes in direct loans for sub-prime borrowers. Another good
online loan source is RoadLoans.com
 .
Get a car
and loan at the same place
A little different kind of solution for people who need a car but have
bad credit is DriveTime.com
DriveTime is the nation's largest used car dealership
with 86 locations in 10 states specializing in selling used cars to people
with credit problems. That's all they do, and because they're also the
bank, they can get a car for almost anyone regardless of their credit
problems. They have a huge inventory of cars in all price ranges, do a
4-stage 53 point inspection on all their cars, and provide a warranty
— things you won't find at other less-reputable dealers who claim
they help people with bad credit. They even provide a convenient way of
making your car payments online. See if DriveTime
has a dealer in your area.
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
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 get the best rates.
It also requires some self-discipline to make sure the bad credit situation
isn't made worst but, in fact, gets better.
For more, see our
related article, Your Credit
Score, How Important Is It? Also
see, Credit Problems and Car
Leasing.
 For
more, see LeaseGuide.com
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