Bad credit car dealerships are dealerships that serve car buyers with bad or no credit. These dealerships promise to give second-chance financing to people who have been rejected for car loans because of foreclosures, bankruptcies, multiple repossessions, or other financial setbacks that have dented their credit rating. Usually, their only ask is that customers make payments on time.
The catch, of course, is they charge bad credit customers much higher interest rates than they would charge good-credit customers to justify the added risk. Ordinarily, the finance and insurance department of a car dealership, which works with lenders, bumps up loan interest rates by slight margins and retains the difference as part of the dealership’s profit.
In the case of a person with bad credit, car dealerships may mark up the buy rate (the rate that the customer is eligible for from a lender) by up to 4 percent. If a customer qualifies for a 6 percent loan, for example, the dealership could inflate it to 10 percent.
Many bad-credit car dealerships advertise guaranteed approvals to get foot traffic on their lots. They know there is no such thing as a ‘guaranteed approval,’ but they dangle the promise to lure customers into lucrative deals. Sometime an unscrupulous dealership may ask a bad-credit customer to take an extended warranty, commit to rust-proofing or buy some other expensive yet unnecessary add-ons as a precondition for financing.
As a rule of thumb, dealerships that make overly generous promises can sometimes be too good to be true. A “bad credit, no credit” dealership that promises to finance customers with no money down and—as a bonus—help them rebuild credit should be regarded with some suspicion.
Designed to Fail
Ideally, the bad credit car dealership making abundant promises would help the customer find the best possible rate. After selling the car to the customer, it would report each monthly payment that the customer makes to credit bureaus and, consequently, help reestablish his or her creditworthiness.
But as well-meaning as that may sound, “bad or no credit” car deals are often designed to fail. In some cases, the dealership is counting on the vulnerable buyer to miss one or two loan payments so it can repossess the car. These dealerships are incentivized to repossess because repo agencies charge huge fees and these fees end up being a major source of income for double-dealing traders.
What dealerships don’t have an incentive to do is help customers build their credit. If anything, the bad ones will avoid filing payment reports with credit bureaus because it costs money to do so. Most independent lots will only report to credit agencies if you skip payments.
Alternative Ways to Get a Car if you have Bad Credit
Many prospective car buyers with poor credit think they have to take what they are offered at bad credit car dealerships because they have no other choice. However, for those who look elsewhere or plan ahead, there are several options to get fair deals.
Here are a few tips to secure financing if you have less than stellar credit:
- Approach non-profit lenders. Community Development Financial Institutions such as Capital Good Fund provide car loans—among other types of loans—to low- and moderate-income households in the states they serve. The amounts and terms offered vary by state and loan purpose, but they are often sufficient to help qualified clients get decent cars. You can find one of these lenders near you because there are Treasury-certified CDFIs in every state.
- Rehabilitate your credit. However bad your credit looks, there’s a chance you can repair it to a decent rating and get a loan from a reputable lender at a moderate but affordable rate. To start, obtain your credit report and pay attention to your risk factors. With any luck, your credit rating may not be as bad as car dealerships—which may have been trying to lure you into high-interest deals—claimed. If it is, make regular payments to show commitment toward clearing your credit card debt and outstanding loans. Most car shoppers can qualify for nonprime or prime loans within a year or two of paying their bills on time.
- Get pre-approved for an auto loan. If you have taken the time to make some improvements to your credit rating, the first place you look to get an auto loan should not be at a bad-credit car dealership. You can get a better deal if you secure private financing before negotiating a sale with a dealership. Obtain auto loan quotes from a number of lenders, then complete a loan application with the lender with the most favorable terms. The lender will review your application and notify you of your approval amount.
- Make a down payment. Most reputable dealerships will work with a customer who has less than stellar credit if he or she can make a decent down payment. A lender will likely ask for at least 10 percent of the purchase price—provided it is not less than $1,000—to consider a customer for an auto loan. You can also ask to use a trade-in as a down payment, but you increase your chances of getting approved if you have cash you can put down.
Buy What You Can Afford
When you qualify for an auto loan from a reputable lender, the interest you pay won’t be as high as it would be if you were repaying a bad-credit car dealership, but it will still be higher than what buyers with better credit pay. To avoid making huge monthly payments and to lower the risk of defaulting and exacerbating your bad credit, consider shopping for an inexpensive car. Most financial experts agree that your total car payments, including monthly loan payments and automotive expenses such as fuel and repairs, should not exceed 20 percent of your net monthly earnings.
Ultimately, if you do your homework, take efforts to repair your credit and shop within the limits of your means, you will find that you don’t need to pay the exorbitant rates that bad credit car dealerships charge.