If you want to get approved at the best possible terms when
buying a car, it's important you know a car lender's credit guidelines before
you apply for credit...especially if you're bankrupt.
It
will save you time and frustration—but more importantly, it will help you avoid
credit inquiries that may lower your FICO credit scores up to 12 points per
inquiry.
Step 1 in making a lease or buy decision
is to determine a lender's credit guidelines.
You
start by asking if they lend to people with a bankruptcy. If so, on what
terms?
That's right. You have to be upfront that you've
filed bankruptcy. Don't hide it. We have to face the fact that some dealers
just won't work with people who've filed bankruptcy. So our job is to find the
ones that do.
Some lenders will only lease to people with a
bankruptcy. Others will only offer purchase financing. Yet still others will
only lend using a hybrid of the two—this is especially common in
Texas.
Ask the finance director at the dealership to direct
you as to what structure the manufacturer prefers.
And
here's a quick tip for you: if your bankruptcy doesn't appear on the credit
report your lender pulls—then, in the eyes of the lender, you're not bankrupt.
The
only lenders I would consider using are:
- First choice: Captive lenders (car
manufacturers) - Second
choice: 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. Just one was leased by a
bank.
That particular deal came from a conversation I had
with Amy, the finance manager at the local Land Rover dealership here in Indianapolis. I told her
I was open to her financing recommendations, but I preferred financing through
the car manufacturer.
I told her my current FICO scores. She
immediately said that with my scores she could do better through a local bank.
I signed a credit application and told her to go for it.
The
next day I signed a lease agreement with that local bank. Being open to her
advice literally saved me hundreds of dollars a month on that
car.
So be flexible...but be careful. It seems most car
dealers call all of their funding sources banks. When in reality some are
banks, some are credit unions, and most are sub-prime 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 want to pass on the sub-prime finance
companies—unless you have exhausted all other options. Sub-prime lenders should
be your last resort.
And only use credit unions if they
report to all three national credit reporting agencies. How do you find out if
a credit union reports to all three credit reporting
agencies?
Simple—you ask. Ask the branch manager at the
credit union if they report. And after you get the loan, check all three of
your credit reports and make sure their trade line appears on each
one.
The three worst luxury captive lenders to lease or
purchase from after bankruptcy are:
1. BMW 2. Mercedes 3. Porsche
The three
worst mainstream captive lenders are:
1.
Honda 2.
Kia/Subaru 3. Toyota
What
makes these the worst?
Once these lenders see that you've
filed bankruptcy, they are less likely to work with you. However, if they are
willing to work with you, they'll want you to be at least several years from
discharge and have perfect credit during that time.
Now that
I told you how bad the above six lenders are—there are times where they may
offer you good deals. For example, if one of the above happens to be the biggest
dealer in your area, they may be able to offer you special deals that a smaller
dealer can't.
Of course, things change all the time with
captive auto lenders. They change their credit guidelines on a whim to meet
their own financial goals. So, it's always 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 down your choice to one or two car
manufacturers.
Step 2 in making a lease or buy
decision is to purchase your FICO credit scores.
It's important 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 enter a dealership with your FICO scores, the
dealer will know you're a more informed consumer and cannot be taken advantage
of. Just know that the FICO credit scores auto dealers use are a little
different than what we see as consumers. The scores the dealers review are
called FICO Auto Industry Option Scores. The good news...these FICO scores may
be higher than your normal FICO scores if you paid all previous auto loans as
agreed.
Some car dealers have told me that if your FICO
scores are higher than the scores the dealer reviews—they may even use your
scores to get a better deal.
You can buy your scores from
myFICO.com.
Step 3 is to interview the remaining
car dealers on a deeper level.
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 get approved? - What credit score is needed to get the
best interest rate? - Do your
lenders prefer offering lease or purchase financing to a bankrupt
debtor? - What incentives are
there to lease or purchase right now?
At this point it's
important to remain open to either leasing or purchasing. Evaluate your options
and incentives. Remember, you're buying the financing. In other words, the most
important factor is the willingness of the lender to loan you
money.
I personally view the lease versus buy decision in
three ways:
1. If you're recently recovering from
bankruptcy, the only thing that matters is if you can get approved at an
interest rate you can afford through a lender that reports to all three
national credit reporting agencies. So you should only consider lenders that
are bankruptcy friendly.
2. Once your credit scores begin to
increase, you can start selecting cars based on which credit reporting agency
the lender uses to determine if you qualify. Obviously, you should choose the
lender who uses your highest FICO credit score to make a lending
decision.
3. When your scores are high enough...or two years
have passed after your bankruptcy...or your bankruptcy doesn't appear on the
credit report the lender uses, then you can choose almost any car you like. But
make sure you still do your research and use your credit scores to help you
compare interest rates, terms and incentives.Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy recovery information. He has helped thousands of people get a car loan after bankruptcy by showing them how to increase their credit score.
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
tweet this!