How to Buy or Lease a Car when You Have Bad Credit
Car commercials on cable television might give the impression that car manufacturers and dealerships are generally willing and eager to do anything short of giving away cars for free in order to win your business. The “catch” usually appears in small print at the bottom of the screen: “subject to credit approval.
” While it’s true that car dealers will always compete for business, they won’t sell or lease to just anyone– if you have bad credit, you may know this first hand. But by doing a little homework, you can avoid the disappointment of being denied approval for the advertised rates, and (eventually) drive off with a satisfying deal.
Here Are How to Buy or Lease a Car when You Have Bad Credit
Get your own credit score and credit report. Everyone is entitled to one free credit report per year from one of the top three credit bureaus (Experian, Equifax or TransUnion). The credit history report will detail all past and current credit accounts, mortgages, loans, and/or leases– including missed payments, late payments, bankruptcies, and repossessions.
Your credit “score”— called the FICO score– is a single number between 300 and 850 that summarizes your credit history, and can be obtained for a few additional dollars. A score between 680 and 700 is considered “prime,” while anything below about 640 is typically considered “subprime.” Scores in the 500s or below are often refused altogether for loans and leases.
Know what to expect. When you try to finance or lease a car with a “subprime” credit score, you can expect to be asked to pay a higher down payment, higher interest rates, and/or a security deposit (for a lease). You may also have trouble getting insurance.
Keep in mind, however, that even extremely low credit scores can sometimes get approved at certain dealerships and in certain situations.
If you’re unsure about just how “bad” your bad credit is, it might not hurt to simply call a few dealerships or insurance agencies and ask them about the likelihood that your credit score would be approved for a lease or loan (they might not give you much information over the phone or without a specific deal in consideration, but it may be worth a shot).
If having a car is not an immediate necessity, consider taking a few months to save money and improve your credit score. A good way to achieve both is to determine how much you can afford for a monthly car payment, and begin setting aside that amount each month.
During this time, maintain regular payments on any credit accounts– on time, and in full (draw from the money you’ve set aside, if it’s necessary).
Because your payment history accounts for the largest determinant of your FICO score (35%), paying your bills on time is crucially important during this period. Once you have saved up enough money for a down payment (from what you’ve set aside each month), your credit score should also be improved to yield better interest rates.
Shop around at different dealerships– and bring along your credit score and report. Each request for a credit report and score (each “credit inquiry”) has a minor negative impact on your FICO score (typically less than five points deducted)– and if you’re shopping around a lot and already have a “subprime” score, this can add up.
The best way to prevent excessive credit inquiries from negatively impacting your credit score is to make them unnecessary by bringing your own score along.
Show your score (preferably in a print-out of the report given by the credit bureau) to the finance director at a dealership, and don’t let them do a credit check until you’ve struck a deal. They should be able to gauge whether or not you’ll qualify for a loan or lease based on the score you show them.
If you got more than one, and they don’t vary substantially, bring them all in case the dealership insists on using their preferred credit agency. This way, you can shop around for the best deal, but without lowering your chances for approval and better rates in the process.
If you’re having trouble getting approved through dealerships, or aren’t satisfied with the rates they’re offering, look for lenders who specialize in “subprime” loans. Dealers and the finance companies they work with are not the only source for loans and leases.
You may get better rates by arranging a pre-approved loan with a sub-prime lender. This can often be done through online lenders who specialize in financing cars for people with poor credit histories.