The Guide to Buying a Car with Bad Credit

Without Using “In House” or “Buy Here, Pay Here” Dealer Financing

Anyone who has ever had credit denied knows this feeling.  It’s humiliating, and makes you feel inferior.  You walk out with your tail between your legs, and feel as though you will never be able to have the car you want or need.

It’s this feeling of insecurity and hopelessness that many “buy here pay here” or “in house financing” car dealerships prey on.  They know that you’re desperate, and they know that they can use your sense of insecurity to dupe you into something you would ordinarily see right through.  They can make you feel as if they’re doing you a favor by financing your purchase at all, and that you would be foolish (and ungrateful) to turn it down.  By exploiting your insecurity, some dealers are able to pull the wool over your eyes.

If you start feeling this way, stop!

Take a look around, and realize that you are probably being purposely misled.  Educate yourself on the tricks frequently employed, and on your realistic options for buying a car with bad credit.  Regardless of your credit history, you should come armed with information and a plan of action.  Whatever the cause, don’t allow anyone to pull the wool over your eyes!

Let’s take a look at some of the most common pitfalls to buying cars with sub-prime credit through dealers that use in-house financing, and then talk about how to avoid them.

The Truth About Buy Here, Pay Here Car Lots & In House Financing Car Dealerships

By far, these dealerships are the absolute worst when it comes to misleading potential buyers, and dupe them out of more money that you care to imagine.  They employ predatory pricing and lending rates, aggressive sales tactics and legal technicalities to practically rob unsuspecting buyers of their money and further damage their credit histories.

Pricing Schemes

Most cars on these lots are sub par, and were purchased at auto auctions for very low prices.  Usually, the dealer’s buying price was low for an unsavory reason.

Here are some eye-opening facts on pricing:

  • Your down payment can be 50% of the dealer’s purchase cost (that they paid for it), and is often equal to it.  This means that any future payments are pure profit.
  • Usually cars are repossessed or returned repeatedly, meaning that the dealer’s purchase price is repaid over and over.
  • The price is normally much higher than the car’s blue book, and buyers believe that they have no option but to accept the price.
  • When the interest rate (up to 30%) is applied, the car’s total price several fold that of what you’d get from a private seller.
  • You drive off of the lot upside down, in a car that’s worth much less than what you owe.

Condition and Warranty

  • Most cars are sold “as-is” meaning that you have no guarantee, even if the car breaks down on your way out of the lot.  Many cars on such lots are flood cars or have been salvaged in some other form, so you are likely to purchase a faulty car.
  • In other cases, you are told that you must buy a warranty in order for the loan to be approved.  This is simply not true, and the warranty is generally worthless anyway due to loopholes in the contract.

Lending Rates and Policy

Buy here pay here dealerships generally have exorbitant interest rates, and many of the policies are misleading and trick unsuspecting buyers out of thousands of dollars.

  • The interest rates alone are considered to be predatory.  Most are more than even credit card companies – around 30%
  • Although your payments may seem low, this is probably because they are stretched out over more than 5 years, meaning that the cost of interest may even be more than the car’s sticker price.
  • Cosign loans are often fraudulent, and your cosigner is actually the primary borrower.  If you cosign, it should be on the same contract.  This is known as the straw purchase scam.
  • If you owe money on a trade-in, the dealer will often not pay off the loan to your original lending agency, and you are still responsible, meaning that you will be paying for two cars!  If you trade in a car that isn’t paid off, obtain in writing that the loan will be paid by the dealer within 10 days.
  • Some dealers will call a couple of weeks after the purchase, and tell you that “your financing fell through” and you will be brought back in to sign a new contract with a higher APR.  This is known as the spot delivery scam.  If you have bad credit, don’t finance through the dealer.  Period.
  • On the contrary, other dealerships will call to say that your APR was lower than the initial deal, and bring you in to resign on a lower payment.  Many times the payment will just be stretched over more time, and the rate is actually higher.  The phone call itself should be a red flag, and if you are asked to resign, look carefully before you agree to anything.
  • Some dealerships will lie to you, and tell you that your credit score is lower than it really is.  Know your current credit score before you buy a car, and go to the dealership with the report in hand.
  • Most bad credit dealers will repossess the car without asking questions.  If you’re late, they don’t negotiate.  They repossess the car, and resell it with another down payment nearly equivalent to their purchase price.  Most lending agencies are willing to negotiate if you’re unable to meet payments.

Yet More Dealership Scams

If you have bad credit, it’s recommended that you get a third-party loan from an agency specializing in bad credit car loans.  We’ll talk about how to do that in a moment.  If you do decide to buy from a “in house financing” car dealer, here are some other scams to beware of.

  • Some dealerships will tell you that your online lender bounces checks, and that they will not accept the financing.  This is just not true.  If it were the case, the lending agency would be shut down.  If a salesperson tells you this, call them out.
  • Some lots will charge a dealer prep fee, which is really just an excessive nonsense fee.  If you can, negotiate not to pay it.
  • Previously wrecked or otherwise damaged cars, sold as-is.  Often cars that are faulty in some way will be sold in this context.  Have the car’s history report in hand before buying.
  • Bidding wars.  We’re partly putting this in as a funny anecdote, but it really did happen.  At one dealership, the salesmen told buyers that another buyer was currently looking at the same car, so a bidding war had begun, and that he or she would have to make a bid higher than the sticker.  Yes, they really can be that shameless.

A Couple Solutions

To put it simply, when buying a car, especially with bad credit history:  Educate, educate, educate.  Get a current credit report, and read all that you can about your options.    Car dealerships, particularly those specializing in bad credit sales, prey on ignorance and the emotional insecurity of bad credit buyers.  You need to know all of your options.

Before taking any action at all, you should be armed with as much information as is possible.  You should know the tricks of the trade, what to watch out for and how to stand up to aggressive or fraudulent marketing and lending practices.  Also, don’t be afraid to just walk away.  There are other cars out there, and you don’t owe the salesmen or the dealership anything for their time.  The car will probably be there the next day, and they will be more than glad to sell it to you if you come back.

Having said that, let’s start to examine your options. If you have bad credit history, it’s best to apply for your loan from a sub-prime lending service.  Often this is an online agency specializing in sub prime lending.  It’s true that online you can also be met with scam online, but if you know what you’re looking at, it’s likely to be your best bet.

Online Approval

Many reputable sub prime lending agencies are available online.  First we’ll look at the criteria for sub-prime credit, and then we’ll talk about how to go about sub-prime lending.

What is sub-prime credit?

This may seem obvious, but here are the credit score categories:

  • Credit above 680 is considered to be a prime borrower.  You will be eligible for very low APR loans and other benefits.
  • Sub prime credit falls between 680-551.  You will pay a higher APR but will be able to apply online.
  • Credit below 550 makes things a little more difficult, although your credit score is not your only deciding factor.  Other qualifications such as income and employment history may help you to qualify, so it’s worth your time to apply.  If may also help to start thinking of ways to boost your score.

What are the Advantages of Applying Online?

When you go directly to a dealership, you’re walking into the unknown.  Applying online helps you to prepare ahead of time, and puts you in control.

Avoiding the Dealership Sales Routine

By applying online, you will be able to enter all of your information and pull up your own credit report before walking into the dealership, meaning that you will be able to look at your options rather than blindly throwing yourself at the dealer’s mercy, which as we discussed above can be very dangerous.  You will be pre-approved to finance your car, and walk in the door knowing that your credit is approved and you’ll be able to avoid the uncertainty and potential for being cheated.

Being in Control

Because your credit is preapproved, you will be in control as the buyer.  Your financing will already be taken care of, so dealerships will not be able to push you into making any of the poor choices given above out of desperation.  Applying online puts you above all of the hassle associated with applying for credit at a dealership.  You won’t be under nearly so much pressure, and will be able to take your time and see for yourself what your credit options are.

Shopping Around

When you apply for sup-prime auto credit online, you are able to look at a variety of different services, see which ones may fit your needs, and find the best rates and payment plans for you.  This allows you to find a financing option that’s right for your credit history and financial needs.  This again keeps you from being put on the spot, and being pressured into something that’s not such a good idea.  You will be able to fully research your options prior to setting foot in a dealership.

When It’s Time to Buy Your Car

So now your financing is approved, and the time has come to buy your car!  Make sure that you are prepared for the big day.  Come armed with an information packet on the cars that you’re interested in, and ask to see a Carfax vehicle history report for each – most dealers should provide this.  Make sure to have all information for your financing with you, and also have your credit report on hand so that if there are any questions, you will be able to present it.

Make sure to take the car for a good test drive, and if you are skeptical, walk away.  You will always be able to come back, and sometimes it’s best not to succumb to the excitement of buying a new car.  This can lead to costly errors in judgment on your part.  Always listen to your gut instinct.

Buying your next car can be a rewarding and successful experience, even with a damaged credit history.  If you make a well-informed decision with a reputable financing service, you are well on your way to being in your dream car with no hidden surprises later. While many people that have bad credit feel that their only option is to use “buy here pay here”, or “in-house financing” car dealers, there are many options available to obtain a real car loan.