If you want to get approved on the best possible terms when buying a car, it is important that you know the credit guidelines of an auto lender before applying for credit … especially if you are bankrupt.
It will save you time and frustration, but more importantly, it will help you avoid credit inquiries that can lower your FICO credit scores by up to 12 points per inquiry.
Step 1 in making a lease or purchase decision is to determine the lender’s credit standards.
Start by asking if they lend to bankrupt people. If so, on what terms?
That’s how it is. You have to be sincere in the sense that you filed for bankruptcy. Don’t hide it. We have to face the fact that some distributors just won’t work with people who have filed for bankruptcy. So our job is to find the ones that do.
Some lenders will only lease to bankrupt people. Others will only offer purchase financing. However, others will only make loans using a hybrid of the two; this is especially common in Texas.
Ask the CFO of the dealership to tell you which structure the manufacturer prefers.
And here’s a quick tip for you: If your bankruptcy doesn’t show up on the credit report your lender gets, then, in the lender’s eyes, you’re not bankrupt.
The only lenders you would consider using are:
– First option: captive lenders (automakers)
– Second option: banks (non-financial)
– Third option: savings and credit cooperatives
Ninety-nine percent of the cars I have rented over the years have been with captive lenders. Only one was leased by a bank.
That particular deal grew out of a conversation I had with Amy, the finance manager for the local Land Rover dealership here in Indianapolis. I told him that I was open to his financing recommendations, but that I preferred financing through the automaker.
I told him my current FICO scores. He immediately said that with my scores he could do better through a local bank. I signed a credit application and told him to do it.
The next day I signed a lease with that local bank. Being open to his advice saved me literally hundreds of dollars a month on that car.
So be flexible … but be careful. It seems that most auto dealers call all of their funding sources banks. When in reality some are banks, some are credit unions, and most are high-risk finance companies.
Here is a list of some of the most widely used subprime auto finance companies:
1. HSBC Automotive
2. Capital One
3. AmeriCredit
4. WFS Financial
You want to dive into the high-risk finance companies, unless you’ve 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 can you tell if a credit union reports to all three credit reporting agencies?
Simple, questions. Ask the credit union branch manager if they report. And after you get the loan, check all three credit reports and make sure your business line shows up on each one.
The three worst luxury captive lenders to rent or buy after bankruptcy are:
1. BMW
2. Mercedes
3. Porsche
The three worst conventional captive lenders are:
1. Honda
2. Kia / Subaru
3. Toyota
What makes these the worst?
Once these lenders see that you have filed for bankruptcy, they are less likely to work with you. However, if they are willing to work with you, they will want you to be at least several years after discharge and have perfect credit during that time.
Now that I have told you how bad the previous six lenders are, there are times when they can offer you good deals. For example, if one of the above happens to be the largest distributor in your area, they may be able to offer you special offers that a smaller distributor cannot.
Of course, things change all the time with captive car 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, but don’t get too hopeful.
Okay, so you’ve done your research and narrowed your choice down to one or two automakers.
Step 2 in making a purchase or lease decision is to buy your FICO credit scores.
It is important that you have your most recent scores when talking to car dealers (like I did with Amy). It puts you in charge.
When you walk into a dealership with your FICO Scores, the dealership will know that you are a more informed consumer and cannot be taken advantage of. Just know that the FICO credit scores used by car dealers are a little different from what we see as consumers. The scores that dealers review are called FICO Auto Industry Option Scores. The good news … these FICO scores can be higher than your normal FICO scores if you paid off all your previous auto loans as agreed.
Some car dealerships have told me that if their FICO scores are higher than the scores the dealership reviews, they can even use their scores to get a better deal.
You can buy your scores at myFICO.com.
Step 3 is interviewing the remaining car dealers on a deeper level.
Start by asking them these questions:
– What credit reporting agency do you use to make a loan 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 to offer lease or purchase financing to a bankrupt debtor?
– What incentives are there to rent or buy at this time?
At this point, it’s important to stay open to leasing or buying. Evaluate your options and incentives. Remember, you are buying the financing. In other words, the most important factor is the willingness of the lender to loan you money.
Personally, I view the lease versus buy decision in three ways:
1. If you are recently recovering from bankruptcy, the only thing that matters is whether you can get approved at an interest rate you can pay through a lender that reports to all three national credit reporting agencies. Therefore, you should only consider bankruptcy-friendly lenders.
2. Once your credit scores begin to rise, you can begin selecting automobiles based on the credit reporting agency the lender uses to determine if you qualify. Obviously, you must choose the lender that uses your highest FICO credit score to make a loan decision.
3. When your scores are high enough … or it’s been two years after your bankruptcy … or your bankruptcy doesn’t show up on the credit report the lender uses, then you can choose almost any if you want. But be sure to keep researching and use your credit scores to help you compare interest rates, terms, and incentives.
