What to Know About Car Buying with Bad (or no) Credit

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Car Buying with Bad (or no) Credit

Posted April 16, 2017
When Cincinnati-based writer Geoff Williams filed for bankruptcy in 2008, he planned to drive his Saturn for as long as he possibly could. Three months later though, his car died on the freeway and Williams found himself applying for financing at a used car dealership.

“We didn’t get a great loan,” he admits, “but we did get a really good, slightly used car and affordable monthly payments.” Despite dealing with the stress of bankruptcy and the unexpected expense of replacing his car, Williams says, “The good news is it’s definitely possible to get a loan through a dealership.” In fact, he coauthored the book Living Well with Bad Credit.

Surprisingly, those with bad credit often have an easier time getting approved for an auto loan than a car lease, according to Sergio Stiberman, CEO of, an online marketplace for car leasing. However, Stiberman says auto financiers and leasing companies care more about the contents of your credit report than the actual number. “Even those individuals with a high score do not always qualify to lease,” he says. “It’s a combination of a lot of different things.”

Experts offered these tips for low- or no-credit consumers in the market for a car.

Check your credit report in advance.

Whether you’re hoping to lease or buy a car, it’s a good idea to check your credit report and clear up any errors before you start shopping. As Jesse Toprak, vice president of industry trends and insights at – which publishes data on car transactions – points out, “A lot of those mistakes take weeks or even months to fix.” For potential lessees, Stiberman says the biggest red flags for leasing companies include past vehicle repossessions or habitual late payments. Try to improve your credit by making timely payments in the months leading up to car shopping.

Look to credit unions for financing.

Even consumers with bad credit can try for preapproval before talking to a dealer. If you have a relationship with a credit union, they’re often more likely to approve your application than a large bank, according to Toprak. “With credit unions they can make personalized decisions based on the relationship,” he explains. Plus, Toprak says credit unions offer some of the lowest interest rates. Most don’t follow a tiered rate system, so as long as you get approved, you’ll pay the same interest rate as another credit union member with a higher credit score.

Save as much as you can for a down payment.

A bigger down payment means a smaller loan, which is less risky for lenders. Plus, you’ll spend less money in interest over the course of your loan, so experts recommend saving as much as you can. Even with a large down payment, you could end up with a high interest rate. But according to Toprak, “For those with really bad credit, [a large down payment] might make the difference between getting the loan approved or not.” He considers 20 percent or more to be a substantial down payment but adds that some dealerships may ask for as much as 40 or 50 percent to minimize their risk. If you have a vehicle for trade-in, that can count toward your down payment, too.

Buy used if you can.

“Generally speaking, if you have bad credit, you have more options when you’re trying to buy a used car versus a new car,” says Toprak. If you can’t get preapproved, dealers often know which financing companies are willing to work with credit-challenged consumers. For those who can’t get a loan elsewhere, Buy Here Pay Here (BHPH) dealerships cater to subprime consumers by financing used cars themselves. Though BHPH dealers often require a substantial down payment and offer high interest rates, Toprak says they are sometimes the only option. “A lot of these dealerships can report your payment history to credit bureaus to help rebuild your credit,” he adds. “A lot of them do it automatically, but some won’t. Make sure they do so you get the full benefit.”

Consider getting a cosigner.

Experts disagree about whether cosigners are a good idea, but it’s one option, especially for young people with no credit history. “If you’re beginning your credit building age, the recommendation [for prospective lessees] would be to get a cosigner,” says Stiberman. “It could be a parent or relative. Once the leasing company approves you, you start establishing credit instantly and can lease on your own next time.” Relatives can also cosign an auto loan. However, Williams says, “I don’t recommend it because I’ve seen it happen with relatives who’ve cosigned and lived to regret it. It’s terrible stress.” In fact, the Federal Trade Commission warns that as many as three quarters of cosigners get asked to repay the loan. If you get approved without a cosigner, you can avoid those potential headaches altogether.

The bottom line? The better your credit report, the more financing options you’ll have, but it’s still possible to buy or lease a car with bad credit, Apply now and see what The Bankruptcy Information and reestablishment center can do for you!

Please Call 1-866-337-7670 with any questions!


How To Buy a Car After a Bankruptcy

How To Buy a Car After a Bankruptcy

Even if your finances have hit the skids and you’ve landed in bankruptcy court, it doesn’t have to mean you need to put the brakes on buying a car.

“Lenders lend to people in bankruptcy all the time,” though interest rates could be sky high, says Edward Boltz, a bankruptcy attorney in Durham, North Carolina, and president of the National Association of Consumer Bankruptcy Attorneys.

The key to buying a car after a bankruptcy, experts say, is to shop around for an auto loan, just as you would if you didn’t have that black mark on your credit report.

When you’re just emerging from bankruptcy, “you’re likely to agree with just about anything they’ll give you. But you shouldn’t just take the first offer you get,” warns Chris Kukla, senior vice president at the nonprofit Center for Responsible Lending.

A study by the center found that in 2009, consumers paid $25.8 billion in extra interest over the lives of their loans due to inflated interest rates, according to Kukla. Those who paid exorbitant interest rates were more likely to fall behind on their loans and eventually have their cars repossessed.

It’s Not Hopeless

But your situation doesn’t have to be that grim. If you’ve had a good track record paying previous car loans or your financial issues stemmed from uncontrollable events, you may very well be able to finance your vehicle through a lender such as a credit union, says Phil Maniaci, senior vice president of CU Direct Corp.’s CUDL Automotive, which administers the largest auto lending service network for credit unions.

Unlike megabanks, credit unions are generally located in the communities that they serve, so those managers understand the vagaries of the local economy, such as a city where a major factory closed, leaving workers unemployed, Maniaci says. Because of that familiarity, “they’re a little more flexible on auto loans.”

Bankruptcy has often been seen as a tactic of those who are financially irresponsible, but unforeseen hardships such as medical bills and divorce often drive people into bankruptcy court.

The situation has been exacerbated by the Great Recession, when unemployment peaked at 10 percent in October 2009. Although the rate had dropped to 7.6 percent in the summer of 2013, many people have wound up in jobs making far less than they once earned. And it’s not unusual for people to be out of work for a year or more.

The recession officially began in December 2007, and since that time, more than 7 million consumer bankruptcies have been filed, according to the American Bankruptcy Institute. Some cases involve a single individual, while others involve couples.

Chapter 7 and Chapter 13

About 70 percent of those who file bankruptcy choose Chapter 7, so most of their debts are erased in a matter of months, but it can stay on their records for up to 10 years.

Most others opt for Chapter 13 in a bid to save their assets. They wind up paying all or part of their debts, and the process can take up to five years. And even when they’ve completed the process, it can stay on their records for up to seven years.

Because Chapter 13 cases can take so long, it’s not unusual for the person involved to need a new car during that time. And the bankruptcy trustees who oversee cases understand that.

“It’s really not hard to get new debt, particularly if you need it,” says Henry Hildebrand III, a Chapter 13 bankruptcy trustee in Nashville, Tennessee. As a bankruptcy trustee, he must approve auto loans or other new debt a consumer wants to take on while in the midst of bankruptcy proceedings.

Don’t Expect a Luxury Car

Although a trustee is likely to approve your getting a new auto loan, don’t expect him to sign off on a new Mercedes or Jaguar. You’re more likely to get the green light to buy a used vehicle below a certain price, such as $20,000, and the maximum interest rate could be capped at rates such as 15 or 18 percent.

That’s far steeper than someone with stellar credit would pay, says Todd Mark, vice president of education for the nonprofit Consumer Credit Counseling Services of Greater Dallas, citing interest rates listed by FICO, which is best known for assigning credit scores.

FICO scores range from a low of 300 to a high of 850. As of mid-June 2013, someone with a credit score of 720 or higher would typically pay around 3.80 APR for a 36-month car loan. At the lower end of the spectrum, someone with a credit score of 500-589 would expect to pay about 17.02 APR, Mark says.

The longer you’ve been out of bankruptcy, and the more you’ve been able to put your financial house in order, the better chance you have of landing a decent interest rate, Mark says. “There’s more time to heal some of the wounds, not just with time but with good behavior” in paying other debt.

Because your vehicle serves as collateral for the loan, “a car loan might be one of the best credit builders post-bankruptcy,” Mark says.

What Lenders Expect

Maniaci says if you’re applying for an auto loan, lenders focus on your history of making car payments and mortgage payments. Your track record for paying on your current vehicle carries the most weight. Lenders’ focus on mortgage payments has slipped a bit in recent years, given the foreclosure crisis and the fact that so many houses are underwater.

Lenders will look at whether you’ve missed a payment or two on your current car loan and are now back on track, and if an uncontrollable incident, such as a job loss, impacted your finances, he says. They’ll also consider your income and monthly expenses. If making the monthly payment is considered a financial stretch, they’ll want you to put more money down on the vehicle, minimizing their risk if they ultimately have to repossess it.

If you’re an existing credit union member and you’ve been reliable making payments in the past, there’s a good shot the credit union will give you a second chance, Maniaci adds.

While it may take time and effort to find a credit union or bank that will lend to you, “just because you have a blemish on your credit report doesn’t mean you can’t get credit somewhere,” Kukla says.

The Trouble with “Buy Here Pay Here”

But consumers don’t like hearing “no,” and feeling like they’re being judged, he says, so they may be inclined to take the first offer they receive. That’s thrown open the doors for “buy here, pay here” auto dealers, where shoppers arrange financing and make payments at the dealership. These dealers, in particular, can be “very aggressive in marketing to people with credit problems,” Kukla says. But that could be disastrous.

Katie Moore, a financial counselor with the nonprofit GreenPath Debt Solutions, says dealers who offer to sell cars with no credit check and no money down “are really preying on consumers who are uneducated about the process.”

They’re likely to offer sky-high interest rates and lengthy loan terms on older vehicles in order to keep the monthly payments low. But it’s not uncommon for the car to break down, while the buyer is still paying on the loan, Moore says.

Kukla says these kinds of dealerships tend to sell vehicles that have 100,000 miles or more on their odometers. The dealerships typically buy the cars at auction, put a bit of money into them and then sell them for two to three times more than their cost.

The dealers then require a down payment of 25-30 percent of the price. “It’s a huge down payment on a very unreliable car,” Kukla says.

The dealerships also charge interest rates at the high end of what is allowed in whatever state they’re doing business. Each state sets its own interest rate limit. In North Carolina, where Kukla is located, interest rates can reach 29 percent.

And in many cases, dealers won’t even tell you the car’s price, he says. “Most don’t set the price until after they look at your credit report,” Kukla says. Once they do, they’ll offer you two or three vehicles to choose among.

Kukla says about one-quarter of those vehicles end up being repossessed, and then can be sold to the next buyer facing a credit crunch.

To avoid being taken for a ride, Moore recommends that if you’re coming out of bankruptcy, you use public transportation if you can’t afford to pay cash for a vehicle.

Shop with Care

Some other ideas come from the National Independent Automobile Dealers Association (NIADA), which includes “Buy Here, Pay Here” dealers among its members. Check with your state attorney general’s office and the Better Business Bureau to see if there are any consumer complaints on file before you do business with a car dealer, suggests NIADA regulatory counsel Shaun Petersen, who previously worked for the consumer protection section of the Ohio Attorney General’s Office.

Also check with friends and family members to see if they can recommend a reliable dealership, Petersen says. Finally, he says it’s imperative to “do your due diligence to find out if a business has a significant number of complaints.” And if there are?

“It could be a red flag for you,” he says.