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.

Steps

  1. 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.
    • While they will request both, car dealerships and lending institutions will likely skip the detailed report and only look at your FICO score. Thus it's worth your while to look at both in order to determine why your score is what it is-- and what (if anything) you might be able to do about it. A low credit score can be the result of many different causes, some of which are more easily reparable than others. For instance, a few late payments on a credit card is not as severe a problem as a recent bankruptcy or foreclosure.
    • Each of the credit reporting agencies uses slightly different data to generate your score, and the scores they report vary accordingly. When your score is lower than "prime," it may be worthwhile to get a report from all three major agencies. If the variance among the credit scores they report is substantial, there's a good chance that one (or more) of the agencies has erroneous data about your credit history. If you suspect this may be the case, call the credit bureau in question or look on their website for instructions on how to file a dispute regarding your credit information. Spotting any such potential errors might improve your credit score considerably.
  2. 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). Try to get a sense for what's feasible in your situation, so that you don't waste time at dealerships where you probably won't be approved.
  3. 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.
    • If you don't already have multiple credit accounts, consider opening a new credit card or store card account and use it to pay between $50 and $100 of your usual monthly expenses. Be sure to pay off the balance completely as soon as you receive a bill.
  4. 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.[1] 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.
  5. 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.
  6. Consider a lease assumption. A lease takeover is often an easy and affordable solution for those struggling to buy or lease a car with bad credit. It involves finding a "seller"--someone who has entered into a lease contract for a car, and found that they can no longer afford payments or for whatever reason no longer want or need the car--and essentially taking over their lease (car, keys, payments and all). The lease company involved in the takeover will still have to check and approve your credit, but in this case the standards for approval are generally not as strict. "Sellers" often offer cash incentives, like no down payment. Online companies can help facilitate lease transfers by matching lease "sellers" with appropriate "buyers" in their area-- just search for "car lease assumption," or "car lease takeover." [2]
  7. Look into used cars for sale by owner. This can be a good temporary fix while you save up or improve your credit in order to buy or lease a new car, but it can also be an alternative avenue to a great and affordable car you'll want to keep for years. Most owners will insist upon cash only at the time of purchase, but under some circumstances (for instance, if the owner happens to be a family member or someone you know well) they may be willing to work out a payment plan. In either case, buying directly from an owner often means paying much less overall than you would at a dealership.
    • Search local listings, and get Kelley Blue Book values for any car you're interested in before you go and see it. Be sure to get values for different conditions the car may be in (excellent to fair). When you go to see or test drive the car, compare the price the owner sets to the KBB value for the condition the car appears to be in. [3]
    • Have the car checked by a mechanic before you buy. Some owners may agree to pay for this inspection, or to split the cost. Pay extra attention to any mechanical problems that will immediately or inevitably need repair, and any problems that won't pass inspection when you take the car in for registration. Many owners will consider offers below their asking price based on this inspection, the KBB value, or both. If they don't, keep looking until you find a fair deal.



Tips

  • Stay skeptical. A dealer might try to use your credit score to haggle you down to a worse deal than you deserve. Don’t jump at the first offer out of desperation.
  • Don’t visit dealerships during their peak business hours. Consider waiting until the end of the day when sales wind down and they might be more anxious to close a deal.
  • Consider finding a co-signer for a lease or loan. A co-signer should be someone with a better credit history, who is willing to assume responsibility for payments if the borrower fall behind or misses them. They are not a co-leaser, but rather a backup to a one-party lease. If you know and trust someone who might fit this role, it might not hurt to ask them to consider it.

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Sources and Citations

  1. ↑ http://www.myfico.com/crediteducation/creditinquiries.aspx
  2. ↑ http://www.leaseguide.com/articles/bad-credit.htm
  3. ↑ http://www.kbb.com/used-cars/?si=buy-known
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