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If you want to get approved on the best possible terms when buying a car, it’s important that you know the car lender’s credit guidelines before applying for credit…especially if you’re bankrupt.
This will save you time and frustration – but more importantly, it will help you avoid credit inquiries that can lower your FICO credit score by up to 12 points per inquiry.
Step 1 in making the decision to lease or buy is to determine a lender’s credit guidelines.
You start by asking if they lend to people with bankruptcy. If yes, on what terms?
This is correct. You must state in advance that you have filed bankruptcy. Don’t hide it We have to face the fact that some dealers will not do business with people who have filed bankruptcy. So our job is to find those who do this.
Some lenders will only lease 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 director of finance at the dealership to instruct you on which structure the manufacturer prefers.
And here’s a quick tip for you: If your bankruptcy doesn’t appear on the credit report pulled by your lender – then in the lender’s eyes, you’re not bankrupt.
Lenders I would consider using are:
– First Choice: Mortgage Lender (Car Manufacturer)
Option 2: Banks (not finance companies)
– Third Choice: Credit Unions
Ninety-nine percent of the cars I’ve leased over the years have been with captive lenders. Was leased only by a bank.
This exclusive deal came from a conversation with Amy, Finance Manager at a local Land Rover dealership in Indianapolis. I told him I was open to his financial recommendations, but I preferred financing through the car manufacturer.
I told him my current FICO score. She immediately said that with my numbers she could do better through a local bank. I signed a credit application and told him to go for it.
Next day I signed the lease agreement with that local bank. Being open to his advice literally saved me hundreds of dollars a month on that car.
So be flexible…but be careful. It seems that most car dealers call all their funding sources as banks. While in reality some are banks, some are credit unions, and most are subprime finance companies.
Here is a list of some of the most commonly used sub-prime auto finance companies:
1. HSBC Automotive
2. Capital One
3. Americredit
4. WFS Financial
You may want to pass on sub-prime finance companies – until you have exhausted all other options. A sub-prime lender should be your last resort.
And only use credit unions if they report to all three national credit reporting agencies. How can you find out if a credit union reports to all three credit reporting agencies?
Simple – you ask. Ask the branch manager of the credit union if they report. And after getting the loan, check all three of your credit reports and make sure their trade line appears on each.
The three worst luxury captive lenders to lease or buy after bankruptcy are:
1. BMW
2. Mercedes
3. Porsche
The three worst captive lenders in the mainstream are:
1. Honda
2. Kia/Subaru
3. Toyota
What makes them the worst?
Once these lenders see that you have filed bankruptcy, they are less likely to do business with you. However, if they are willing to work with you, they will want you to have been discharged for at least several years and have decent credit during that time.
Now that I told you how bad the above six lenders are– there are times when they may offer you good deals. For example, if one of the above is the largest dealer in your area, they may be able to offer you special deals that a smaller dealer may not.
Of course, things change all the time with captive auto lenders. They quickly change their credit guidelines to meet their own financial goals. So, it’s a good idea to at least research these dealerships—just don’t get your hopes up too high.
OK, so you’ve done your research and narrowed your choices down to one or two car manufacturers.
Step 2 in making the decision to lease or buy is to shop your FICO credit score.
It is important that you have your most recent scores when you talk to car dealers (just like I did with Amy). It puts you in charge.
When you walk into a dealership with your FICO score, the dealer will know that you are a more informed consumer and don’t want to be taken advantage of. Just know that the FICO credit score auto dealers use is slightly different from what we see as consumers. The scores reviewed by dealers are called FICO Auto Industry Option Scores. Good news… these FICO scores can be higher than your normal FICO score if you’ve paid off all previous auto loans as agreed.
Some car dealers have told me that if your FICO score is higher than the dealer’s reviewed score – they may even use your score to get a better deal.
You can buy your scores from myFICO.com.
Step 3 is to conduct an in-depth interview of the remaining car dealers.
Start by asking them these questions:
Which credit reporting agency do you use to make a lending decision?
– What is your minimum credit score requirement to be approved?
– What credit score is needed to get the best interest rate?
– Are your lenders willing to offer lease or purchase financing to an insolvent debtor?
– What are the incentives to lease or buy now?
It’s important to be open to either leasing or buying at this point. Weigh your options and incentives. Remember, you are buying financing. In other words, the most important factor is the lender’s willingness to lend you the money.
I personally look at the lease vs buy decision in three ways:
1. If you’re recently recovering from bankruptcy, the only thing that matters is whether you can get approved for an interest rate you can afford through a lender that complies with all three national credit reporting agencies. reports. That’s why you should only consider lenders who are bankruptcy friendly.
2. Once your credit score starts rising, you can start selecting cars based on the criteria the lender uses to determine whether you qualify. Obviously, you should choose the lender that uses your highest FICO credit score to make a loan decision.
3. When your scores are high enough…or two years have passed since your bankruptcy…or your bankruptcy does not appear on the credit report used by the lender, you can choose almost any car you like. Can But make sure you still do your research and use your credit score to help you compare interest rates, terms and incentives.
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