Six tips for buying a car with less-than-prime credit

(September 30, 2013) IRVINE, Calif. — As the end of the model year approaches, has released its 2013 Top Tips for Buying a Car with Less-than-Prime Credit. With current auto loan interest rates remaining attractively low, consumers could soon be venturing to dealerships to take advantage of late 2013 vehicle model deals. But for buyers with less-than-prime credit, the prospect of purchasing a vehicle can fill them with trepidation.

"While over 40% of all car buyers have below-prime credit, few tools — and little advice — exist in the market specifically targeted to this growing population," said CarFinance President and CEO Jim Landy. "Our mission is to help these consumers through the vehicle purchasing process. So, our experts put together a list of insider tips to put consumers with less-than-perfect credit on the road to a quality vehicle that is affordable, with financing that is sustainable, and that should help them build strong credit."

The tips

1. Be Realistic About What is Affordable — Start with Actual Cost of Ownership

Many consumers begin and end with the purchase price of a vehicle when budgeting what they can afford. This is a common and dangerous error, because budgeting for just that monthly payment is only one part of the actual cost of owning a car — all related vehicle expenses, including gas, insurance, annual registration, routine maintenance, etc., should be included in the overall budget. 

This is especially critical for below-prime car buyers whose credit profiles are particularly vulnerable. Understanding the true monthly cost of vehicle ownership allows consumers to focus their search on vehicles they can afford prior to entering a dealership.

For insight into understanding true cost of ownership for vehicles purchased with below prime loans,
click here.         

2.  Assess Current Credit Situation — and Improve It

Given what a large part of the actual cost of vehicle ownership financing is, it's important that consumers know — and understand — their credit scores.   A consumer's credit score not only impacts whether or not he/she is going to be approved, but also the amount financed and, importantly, what the interest rate will be.

Understanding credit scores can be complex as they can be influenced by multiple, and sometimes contradictory, factors, including the number of credit accounts and any delinquencies on those accounts; the number of credit accounts applied for; number of open loan payments; total credit limit; total balance owed across accounts; bankruptcies, and even not having any credit accounts (closing a credit card with a long history can have a negative impact).

Consumers can find out their credit score for free at various online sources and should remember that different lenders have different score criteria.

3.   Get Financed Online — and Early 

Consumers should know how much they can be financed for, what the interest rate is, and how it impacts the overall cost of ownership, before walking into a dealership.  One of the most efficient ways of doing that is by applying for a loan online from a direct lender.  While many buyers may be hesitant to seek an auto loan prior to obtaining their vehicle, entering a dealership with approved financing in place will simplify the sales process for buyers, especially for those with less-than-perfect credit.

4.   Understand Trade-In Value

Most consumers have an existing vehicle to trade in, which will impact how much financing they need for their next vehicle. Understanding the market value of the trade-in and what the existing loan balance is, if any, is critical. 

If the consumer doesn't have a loan on the existing vehicle, then the market value provides a good idea of how much is available for a down payment from the trade-in.  However, if the consumer is still making payments, then he/she will need to contact the finance company to find out the payoff amount on the existing loan. 

The difference between the vehicle's market value and the payoff is referred to as 'equity', and the equity can contribute to the down payment.   Sometimes, the equity can be negative, meaning that the loan payoff is greater than the market value of the vehicle.  It is important to note that a vehicle can still be purchased even with negative equity in the trade-in, but the buyer will need to work closely with the lender to factor the negative equity into the next loan.

5. Be the Vehicle's Encyclopedia

Below-prime car buyers should go online and research everything there is to know about the car they are interested in — from invoice pricing, rebates, cost of ownership, maintenance, specifications, and more. They can also check to see which vehicles other below-prime car buyers are purchasing as a possible starting point.

Expert reviews are great resources to better understand the vehicle's characteristics, such as handling, power, and cargo space.  But consumer reviews are also invaluable and are readily available on the Internet. And using social media to solicit advice can also be helpful, i.e. asking friends on Facebook.  Car shoppers should see what other owners are saying about reliability and cost of parts and maintenance.

Researching a late-model version of the chosen vehicle can also make sense.  Since a vehicle loses 11% of its value when it is driven off the lot, a late model version with relatively low mileage, good reliability history, modern design and safety features can provide excellent value at a substantially lower price point.

6.  Ignore the Myths, Listen to the Reality

Although the overall car buying/loan environment has changed significantly over the last several years — with lower interest rates and consumers holding onto their vehicles for much longer — fallacies about the below prime auto loan process persist, such as the myth that consumers always need a large down payment, or that longer loan terms are always bad or that being in the same jobs for years is essential to qualify for a loan. For more information on myth versus reality for below prime loans,
click here.