If you want to get approval on the most favorable terms when buying a car, it is important that you know the rules of car loans before applying for a loan … especially if you are bankrupt.
This will save you time and frustration, but more importantly, help you avoid credit inquiries that could lower your FICO credit scores to 12 points per request.
Step 1 when deciding on a lease or purchase is to determine the credit principles of the lender.
You start by asking whether they give loans to people with bankruptcy. If so, under what conditions?
It's right. You must be honest that you have declared bankruptcy. Do not hide it. We must recognize the fact that some dealers simply will not work with people who have declared bankruptcy. Therefore, our job is to find those that do.
Some lenders only rent to people with bankruptcy. Others will only offer purchase financing. Still, others will lend only using a hybrid of the two – this is especially common in Texas.
Ask the CFO at the representative office to tell you which structure the manufacturer prefers.
And here's a quick tip: if your bankruptcy does not appear in the credit report that your creditor pulls out, then, in the opinion of the creditor, you are not bankrupt.
The only lenders I would like to consider are:
– First choice: captive lenders (car manufacturers)
– Second choice: banks (not financial companies)
– Third choice: credit unions
Ninety-nine percent of the cars I have rented over the years were held by captive lenders. Only one was leased by a bank.
This particular deal came from a conversation with Amy, the financial manager at the local Land Rover office here in Indianapolis. I told her that I was open to her recommendations on financing, but I preferred financing through a car manufacturer.
I told her my current FICO ratings. She immediately said that with my results she could do better through a local bank, and I signed a loan application and told her to do it.
The next day I signed a lease with this local bank, and openness to her advice literally saved me hundreds of dollars a month on this machine.
So be flexible … but be careful. It seems that most car dealers call all their sources of financing banks. If, in fact, some of them are banks, then some are credit unions, and most are non-core financial companies.
Here is a list of some of the most commonly used sub-prime auto finance companies:
1. HSBC Automotive
2. Capital One
4. WFS Financial
You want to transfer financial sub-companies – if you have not exhausted all the other options. Subprime lenders should be your last resort.
And use credit unions only if they report to all three national credit agencies. How do you know if a credit union is accountable to all three credit agencies?
Simple – you ask. Ask the branch manager at the credit union if they report. And after you get a loan, check all three of your credit reports and make sure that their trading line appears on each.
The three worst luxury lenders for renting or buying after bankruptcy are:
The three worst major lenders are:
2. Kia / Subaru
What makes it worse?
Once these lenders see that you have declared bankruptcy, they are less likely to work with you. However, if they want to work with you, they will want you to be at least a few years after discharge and have the perfect loan during this time.
Now that I have told you how bad these six lenders are, there are times when they can offer you great deals. For example, if one of the above is the largest dealer in your area, they may offer you special offers that smaller dealers cannot do.
Of course, everything changes with regular auto lenders. They change their lending principles at their whim to achieve their own financial goals. So it’s always a good idea to at least explore these dealerships – just don’t expect too high.
So, you conducted a study and narrowed down your choice to one or two car manufacturers.
Step 2 when making a rental or purchase decision is to purchase your FICO credit points.
It is very important that you have the most recent ratings when you are talking to car dealers (just like I did with Amy). This holds you accountable.
When you enter the dealership with your FICO points, the dealer will know that you are a more informed consumer and cannot be used. Just be aware that the FICO credit ratings used by car dealers are slightly different from what we see as consumers. The dealer rating is called FICO Auto Industry Option Scores. The good news … these FICO points may be higher than your regular FICO points if you paid all previous car loans as agreed.
Some car dealers tell me that if your FICO scores are higher than the scores that the dealer is considering, they can even use your scores to get a better deal.
You can buy your results at myFICO.com.
Step 3 – conduct an interview with other car dealerships at a deeper level.
Start by asking them these questions:
– Which credit agency do you use to make a loan decision?
– What is your minimum credit rating to get approval?
– What credit score is needed to get the best interest rate?
– Do your creditors prefer to offer leasing or purchase financing to a bankrupt debtor?
– What incentives are there now for rent or purchase?
At this stage, it is important to remain open for leasing or purchase. Rate your options and incentives. Remember, you are buying financing. In other words, the most important factor is the lender’s willingness to lend you money.
I personally consider the decision to rent and purchase in three ways:
1. If you recently recovered from bankruptcy, the only thing that matters is whether you can get approval at the interest rate that you can afford through a lender who reports to all three national credit reporting agencies. Therefore, you should only consider lenders who are bankrupt.
2. Once your credit ratings begin to increase, you can start choosing cars based on which lender the lender uses to determine if you are eligible. Obviously, you must choose a lender who uses your highest FICO credit rating to make a loan decision.
3. When your grades are high enough … or two years have passed after your bankruptcy … or your bankruptcy is not shown in the credit report that the lender uses, then you can choose almost any car that you like. But make sure that you are still doing research and using your credit scores to help you compare interest rates, terms, and incentives.