Special Finance Car Loans give you a second chance.
Using a car loan to re-establish your credit.
You see the ads that promise anyone with bad credit, bankruptcy, repossessions or other finance sin, will be driving a new car in hours. Dial this 800# or fax your information to XYZ Company and wait for your pre-approval code. Well, not exactly.
Given that a bankruptcy discharge is a second chance to start over without the burden of debt, a car loan does provide one avenue for getting back on the road to better credit. However, that loan does not come without specific rules and responsibilities, including the need to pay the monthly bill without delay or late charges; not a day before the late charges hit. Alas, I digress. Let’s start at the beginning of this myriad of steps to getting a Second Chance loan.
The Scavenger Hunt. First, gather all your important truth-telling documents: proof of income, pay stub, W2, 1099, last year’s tax return, for every job. If you get paid in cash, get letters from the employers stating how much cash you received in the past 12 mos. You will need a bank statement or deposit slips to provide proof of the cash. Proof of residence: mail, lease agreement, current bills mailed to that address. Auto insurance card. Mortgage statement, or rent receipts, lease agreement in your name or listed as a sublet. Two recent bank statements. Social security card. Driver’s license. Current phone bill with all the pages. Cellular bills are a weak second to a home phone bill. Provide the home phone bill even if it isn’t in your name. Ten personal references: listing the name, address, phone and relationship to you. Letter from your employment, showing years of service and wage status. ADDITIONAL DOCUMENTATION when appropriate: Title to your trade-in. If the trade-in has an open loan, bring the loan account information and original contract. Registration and proof of insurance on the trade-in. If you had a car loan years ago, provide proof of that paid off agreement. Home foreclosure or auto repossession, provide proof of payoff where applicable. Divorce decree. Bankruptcy discharge. Proof of a totaled vehicle if the loan balance is still in dispute. Make several copies and combine as a set. Your will need a set for each dealership you visit.
Down payment. $1,000.00 minimum. Banks require 20% of the selling price of the vehicle, as down payment. A free and clear trade may make up a portion of this, but cannot be overstated to cover the entire amount. BEWARE of dealers advertising a Push, Pull or Drag trade-in allowance of $4,000. (Remember that old saying, if it’s too good to be true, it probably isn’t true. Figuring out where the $4000 for a $10.00 car came from, should not be too hard to figure out when you see the selling price of the car. The banks know it too!)
The Score. The conversation will turn to “What is your Score?” This is the FICO or Auto Fico credit rating on you. Every person has a history recorded by the three credit reporting agencies: TRW, Equifax and TransUnion. Your payment history factors into a score which determines the amount of risk associated with giving you a loan. (Remember, having a house loan doesn’t necessarily make you an honor student. You can’t take off with a house, but you can steal a car. Auto recovery rates are considered in the risk equation.) Pick one dealership location and allow them to run a credit inquiry. Ask to see all the reports and note the AUTO score of each one. Dealerships are NOT allowed to give you a copy of the credit report, but you should ask for a copy of the application. The dealership is required to give you a copy of the SIGNED application. Upon receipt, note the dealership name on the paper, and stow it away for safe keeping. Have your credit application run only once. When speaking to different dealership personnel, tell them what your score is on each bureau. Repeated credit inquiries will reduce your score and buying power, considerably. When the final deal is made, the dealership will make a credit inquiry for their use in getting the loan approved.
Visiting the dealership. The criteria for selecting a dealership should be:
- Reputation and Consumer complaints.
- Quality and quantity of late model pre-owned vehicles.
- Largest rebates on new models.
Go to the dealership website and complete an online finance application, keeping a copy for yourself. When the Internet or Second chance finance manager calls, discuss your situation openly. The majority of dealership personnel in this position knows what you are dealing with, and want to make the process easy. Dealing with you professionally, there is no place for an attitude on either side of the desk. This process should be completed without feelings of duress, embarrassment or humiliation.
The cost of bad credit. Regardless of the reasons for why you have a credit problem, the banks only do business where they can be assured they will be able to collect the full debt. Interest rates cover the gamut from 15% to 30% depending on your credit history. In some states there is a cap or “usury” law that limits the amount of interest charged on a loan. Nevada has no such law. Additionally, banks are allowed to charge a service fee to acquire the loan. The costs are typically $295.00 to $1500.00. Dealerships have no control over the bank’s decision, although the more banks the dealer has relationships with, the better chance you have of getting the right financing package.
A bank representative will call you to verify all the information provided is correct, before the final approval is given. When questioned; be pleasant and answer honestly. This is another area where attitude has considerable impact on the loan approval process. Misrepresentations are considered illegal acts, punishable under the law.
Picking the vehicle. The dealership must match the buyer, the car, the bank, and the down payment to make the loan happen. It is not easy to get these deals financed and it is not always on the car you envisioned yourself owning. The older, high mile model is not the means to a lower payment. The dealership will suggest vehicles in a certain price range based on your credit situation and monthly income: typically, 15% of you gross monthly income as a model auto loan payment. Select a model you will not outgrow in a few years. DO NOT pick the biggest, baddest vehicle on the lot because the payments you make will not keep up with the depreciating value of the vehicle. Over time you will feel too much pressure from the payment and will want to “dump” the vehicle, resulting in more damage to your credit. Buy the big, fancy model when you have achieved you goal of a superior credit rating resulting in the lowest possible interest rate. For the first step to credit recovery, select a modest, mid-priced vehicle that suits your needs. Drive the vehicle. Check the service history. Ask about the remaining factory warranty and if the vehicle is certified. A Certified vehicle means the manufacturer has provided additional warranty coverage at a reduced price to help sell the off-lease and returned rental models one or two years old. If no certification is available for the car you selected, purchase an extended service contract from a major manufacturer; GM, Chrysler, Ford. Make sure the coverage is appropriate for the vehicle.
Taking delivery. The dealership personnel will want you to take the vehicle home that day. The reasoning is, “If you have custody of the car, they can’t sell it to someone else.” If you have your down payment and documentation in hand, insurance up to date and need a car desperately, you may want to take the new vehicle home. However, consider this scenario before palming the keys. How will you feel if the dealership calls and says you must come in and do more paperwork? Will you be disappointed if the bank says “NO”, and you have to give back the car? Will you be angry if the payment you negotiated and signed for goes up? If you are going to get upset over any of these possibilities, have the dealership provide a bank approval before you take the car off the lot.
The future of a second chance-high interest loan. While you can elect to refinance the loan at anytime, most consumers find that without additional down payment at the time of refinancing, a lender will not negotiate a lower interest rate loan in less than two years. Pay the auto loan perfectly. The alternative finance lenders keep internal records and ratings that they share amongst themselves, when evaluating risk. If you are consistently paying the bill on the tenth day, this information is noted and an “internal score” is denoted for your behavior. Slow pay equals no-pay. Slow pay indicates you are having trouble making the payment, and the lender isn’t getting the interest in a timely fashion. This track record greatly reduces the likelihood of you’re refinancing at a lower rate.
After several years of perfect payment history in all aspects of your life, you should be able to purchase another vehicle at a rate commiserate with your credit score and average quality credit. Keep this pattern going and in five years you will be in great shape for the vehicle of your dreams.
Visit MyCarLady.com for help with your next new or used car purchase. Or email Sarah at sarahlee@mycarlady.com.
Sarah Lee © The CARLADY