If you want approval on the most favorable terms when buying a car, it is important to know the credit rules for the car lender before applying for a loan ... especially if you are bankrupt.
This will save you time and frustration - but more importantly, it will help you avoid credit requests that can lower FICO credit points to 12 points per request.
Step 1 in deciding whether to rent or purchase is to determine the lender’s credit management.
You start by asking if they provide people with bankruptcy. If so, under what conditions?
Correctly. You must be in advance that you filed for bankruptcy. Do not hide it. We have to deal with the fact that some dealers simply will not work with people who have filed for bankruptcy. Therefore, our task is to find those that do.
Some lenders will only rent people with bankruptcy. Others will only offer purchase financing. However, others will only use a hybrid of the two - this is especially common in Texas.
Ask the financial department director at the dealership to tell you which structure the manufacturer prefers.
And here's a quick tip: if your bankruptcy does not appear in the loan report, then your lender pulls in - then, in the eyes of the lender, you will not go bankrupt.
The only lenders I would consider are:
- First choice: Captive lenders (car manufacturers)
- Second choice: banks (non-financial companies)
- Third choice: credit unions
Ninety-nine percent of the cars that I rented for many years were with captive creditors. Only one was leased by the bank.
This particular deal came from a conversation I had with Amy, the finance manager at the local Land Rover office here in Indianapolis. I told her that I was open to her financial recommendations, but I preferred financing through a car manufacturer.
I told her my current FICO ratings. She immediately said that with my estimates she could do better through a local bank. I signed a loan application and asked her to go for it.
The next day, I signed a lease with this local bank. Being open to her advice, literally saved me hundreds of dollars a month on this car.
So be flexible ... but be careful. It seems that most car dealers call all banks of their sources of financing. When in fact some banks, some of them - credit unions, and most of them - sub-standard financial companies.
Here is a list of some of the most commonly used sub-standard auto finance companies:
1. HSBC Automotive
2. Capital One
3. AmeriCredit
4. Financial
You want to transfer sub-standard financial companies - unless you have exhausted all other options. Substandard lenders should be your last resort.
And use credit unions only if they report all three national credit reporting agencies. How do you know if a credit union meets all three credit reporting agencies?
Just ask you. Ask a branch manager at a 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 of them.
The three worst creditors as lessees for renting or buying after bankruptcy are:
1. BMW
2. Mercedes
3. Porsche
The three worst creditors are basically not:
1. Honda
2. Kia / Subaru
3. Toyota
What makes them worse?
As soon as these creditors see that you filed for bankruptcy, they are less likely to work with you. However, if they are willing to work with you, they want you to be at least a few years from discharge and have an excellent credit during this time.
Now that I have told you how bad these six lenders are, there are times when they can offer you good deals. For example, if one of the above events is the largest dealer in your area, they may offer you special offers that small dealers cannot make.
Of course, all the time changes with the help of car lenders. They change their credit guidelines on a whim to achieve their financial goals. Thus, it is always a good idea to at least research these representative offices - just do not pin hopes on too high a level.
Ok, so you did your research and narrowed down your choices to one or two automakers.
Step 2 when deciding whether to rent or purchase is to acquire FICO credit scores.
It is important that you have the latest ratings when you talked to car dealers (like me and Amy). He puts the responsibility on you.
When you enter the dealer network with your FICO ratings, the dealer will recognize you as a more informed customer and cannot be used. Just know that FICO credit ratings used by car dealers are a little different from what we see as consumers. Dealer review ratings are called FICO Auto Industry Option Scores. Good news ... these FICO estimates may be higher than your regular FICO estimates if you paid all previous auto loans, as agreed.
Some car dealers told me that if your FICO scores are higher than the dealers scores, they can even use your points to get the best deal.
You can buy your grades on myFICO.com.
Step 3 - Interview the remaining car dealers at the defect level.
Start by answering these questions:
- Which credit reporting agency do you use to make a credit decision?
- What is your minimum credit score to get approval?
- What credit rating is needed to get the best interest rate?
- Do your creditors prefer to offer rent or purchase financing to a bankrupt debtor?
- What are the incentives to rent or buy right now?
At this stage it is important to remain open for rent or purchase. Rate your options and incentives. Remember that you are buying financing. In other words, the most important factor is the lender’s desire to hand over money to you.
I personally consider the decision to rent and purchase in three ways:
1. If you have recently recovered from bankruptcy, the only thing that matters is that you can get approval at an 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 scores begin to increase, you can start choosing cars based on which credit reporting agency the lender uses to determine if you are eligible. Obviously, you must choose a lender that uses your highest FICO credit rating to make a lending decision.
3. When your points are high enough ... or two years have passed after your bankruptcy ... or your bankruptcy does not appear in the credit report that the lender uses, then you can choose almost any car you like. But make sure you still do research and use your credit scores to help you compare interest rates, conditions, and incentives.
