Monday, 31 August 2020

How To Buy A Car For People With Bad Credit

How To Buy A Car For People With Bad Credit

I'm writing this article for you so that way you have an excellent idea of what it takes to go in and buy a car. I want to talk to you about credit. Sometimes people have bad credit, some people don't have any credit, and sometimes people are just first-time buyers and they need to buy a car and they have a bunch of questions. The purpose of this article is to break all that stuff down so that way you feel prepared, you feel educated, you're not vulnerable when you go into the dealership, and you don't have to worry about anybody taking all of your hard-earned money.


Let's get started


What Is Credit

let's talk about credit, and how it works, and why it works the way it does, and why we are forced to be in debt in order to have a credit score so that way we can buy things that we can't afford.

Basically, the way it works is there are three credit bureaus

  1. TransUnion
  2. Experian
  3. Equifax 

Each one of them is going to give you a score. A lot of times you're going to hear the word "FICO" throughout your life when you're buying things. What the FICO is? That's the middle score of the three 

Let me give you an example if you have one score through TransUnion that is a 720, and then you have an Experian score that is a 680, and let's say your Equifax score is 650. Your FICO score is the 680 because it's not the highest, it's not the lowest, it's right in the middle.

When you're buying a house and stuff like that, that's what they'll go with is the FICO score. But when buying a car, most banks are going to go with the TransUnion Bureau. 

Based on those three scores, depending on what your scores are because everybody is different. Everybody has different jobs, different incomes, different work histories, they've been at their place for a certain amount of times a lot of people think like, oh, my credit score is the most important thing. But when buying a big purchase or making a big purchase, you got to think of your credit score like baking a cake. Think of the credit score like the eggs. It's not the most important part, but it is an important part. 

The other factors are 
How long have you been at your house?
How long have you been at your job?
How much money do you make? 

Those are all important factors as well, so keep that in the back of your mind as well. 

  • If you're above a 700 score. Then that means you are "tier A" so you have "A" paper credit, you are creditworthy. People know that they can trust you with money, with loaning you money.

  • Between around 680 to 700 that's like right around "tier B" you're still good. They know that you're gonna payback. You already have a history of paying back the money.

  • Between 650 and 680 that's where your "tier C'. In "tier C', that just means like it's kind of shaky.

  • Anything below 650 you're considered "tier D" and anything under 600 is, you got bad credit.

When you do have bad credit, that means that for a bank to loan you money it's gonna be riskier for them. So by it being riskier, they're going to charge you more money. But depending on what your credit score is will determine what kind of interest the bank is going to charge you for borrowing the money from them. Think about it like this. Let's say you are a 700 score person or 700 plus, and you have excellent credit then you're probably going to get somewhere a like if you're buying a used car you're probably gonna get somewhere between 3% to 5% depending on the age and the miles of the car. If you're buying a brand new car, 700 or plus, you're going to automatically qualify for 0% interest which is always the goal. Because when you can borrow free money that's always best for you because you know you're not spending extra money going out on top of the money that you're paying to your payment to bring down the principal of your loan.

Keep in mind that there is no prepayment penalty in California you can always pay off a loan early, and by doing that will save you money and you pay less interest to the bank. So keep that in the back of your mind.


Having A Good Credit

Another cool thing to think about too is when buying a car, one of the things that you can do to automatically protect yourself. If you have decent credit to good credit, go to the bank and get pre-approved on your own before you step foot into a dealership. By doing that, it's going to give you more control of how the deal goes down, it's going to give you more buying power because you are already pre-approved, the dealership already knows that a bank has approved you so you have the money, you just have to find the car and that's a good position to be in.


Having A Bad Credit

Now, when you don't have the best credit and you don't have money down, that's where it gets tricky, and that's where it gets really tough, and it's hard to get people financed because you've already proven that you can't pay back the money. I know that's a hard pill to swallow, and it sucks, and you don't want to hear that. But if you have a 540 credit score that means that in the bank's eyes, you're not a reliable person to loan money to because the chances of them getting that money back are slim to none. So what they do is, they charge you a really high-interest rate? Let's say if you're getting charged 20% for every dollar, 20 pennies of that dollar is going straight to the bank's pocket, and only 80 cents is going to bring down the principal of your loan. The more money that you pay on your monthly payment to the bank that goes to the principal of your loan is going to bring that down faster, you pay it off quicker then you get your pink slip even that much faster.


Co-signer

The banks also understand that bad things happen to good people. A lot of times I hear all the time like, I used to be a 750 credit score, I was an 800 credit score, I had 740 credit score, and this happened, this happened, this happened. I got into an accident, I couldn't work, I couldn't pay my bills, I maxed out all my credit cards, now I'm a 540.

Those people. When you're going to start re-establishing your credit and let's say if you did have a cosigner. It always works best and I'm just talking about here in California because I'm not sure where other states are. More banks will take a cosigner that lives at the same address. If the cosigner and the applicant with bad credit live in the same town but at different addresses, they're gonna get rated to go with the person with the bad credit score if they don't live together. So when looking for a cosigner it's best if you do it with somebody that lives with you. 

I don't want you to think that, oh, I'm just co-signing for him. So it's not my responsibility, I'm just the cosigner. "no' that's completely a wrong way of thinking about it. If you cosign for somebody or if you ask somebody to co-sign for you, just know that you're asking for a huge favor because there's nothing more important in America than credit, and if you ask somebody to do that, respect them, respect them enough to know that you're gonna do everything you can to make that payment, and then refinance that car as soon as you can so that way you can take that person off, get them off the hook, they've already served their purpose, they got you your car, and then now you're in a much better position to do things on your own. And you never want to tie up somebody's credit for six or seven years. Don't do that to your friends and family.


Having Zero To No Credit.

You're going to need a down payment. Because the way the bank looks at it, and if you look at it the way the bank looks at it it'll be a lot more clear for you. They look at it as if the more skin in the game that you have, the more money that you're pulling out of your pocket, and putting into the deal the less likely you are just to walk away from making that payment.

Let me give you an example, I'm looking at a $20,000 car, I have $5,000 down. That's a 25% down, and the likelihood of me walking away from $5,000 is minimal. Because who wants to walk away from $5,000? that's pain, that hurts. So they know that the more money that you have down, the more likely you are to make the loan and to continue making your payments. But what happens if you don't have $5,000 down or you don't have 25% down. So that way you're in a position.


What Is A Equity Position?

Is where you have financed less than what the car is worth. That means the car is worth more than the amount that you have financed. Cars worth $20,000, you only financing $15,000. That's what I mean by in an equity position.

When you're in an equity position. The bank is going to charge you less of an interest rate. Let's say if you don't have the full $5,000, but manufacturers offer incentives, they offer rebates, they offer arm twisters to get you in to go buy that car. Let's say if you go to the Ford store, and you're looking at a $20,000 Focus and there's a $3,000 rebate, and you got $2,000, well, guess what? That $3,000 rebate acts as your down payment. So that's how the bank sees it so you have a $5,000 down payment. Keep that in mind, because you may need to buy a car that has rebates to get you qualified.


Make Your Payment On Time

Remember, once you get on that track, and you get your car loan then that's immediately when you have to make your payment's consistently on time, every time.

Let's talk about this for a minute. There are three bureaus that we were talking about before right?

  • TransUnion 
  • Experian
  • Equifax

By law, each one of those bureaus has to report or the bank has to report to those three bureaus that you either made your payment late, you make your payment on time, or you didn't make your payment at all. So at least make those payments consistently for one year because by doing that, you're gonna get a minimum of four ratings that you've made your payments on time every time. If they rate you every single month, then it's just gonna help you even more. So that's when you can either sell that car, trade it in for another one, refinance it, lower your interest, and then the sky's the limit from there. But you need to start somewhere.


You Need To Setup A Budget 

Why it's important for you to set a budget before you go into a dealership so that way you're not buying anything or forced into buying something that you can't afford and that way you're not set up to fail again. The rule of thumb is for every thousand dollars that you financed, it's $20.00 in payment per month. A $5,000 car loan is going to be $100 a month. A $10,000 car loan is $200 a month. A $15,000 car loan is $300 a month. And a $20,000 car loan is $400 a month. Just keep that in the back of your mind. That formula is based on a 10% interest rate at a 60-month term. So if you wanted a $20,000 car, but you didn't want to pay $400, you can see if you qualify for a 72-month loan, and that will bring down your payment right around $350 or depending on the rate that you get qualified for. 
  • Having said that. One thing that you need to consider is that if you're wanting a car that's really inexpensive, you can't finance less than a $5,000 car loan. Now, that's just here in California. If you were to take out a personal loan and buy a car that's different, but through a car dealership, the minimum that you could pay for a car and get a car loan is $5,000. Just keep that in the back of your mind. 

A lot of people think like, oh, the less expensive the car the easier it is going to be qualifying for. That's not the case either. If you're a first-time buyer or if you have bad credit, and let's say your average income is $20,000 to $30,000 a year. The bank probably doesn't want to see you around the $15,000 car. That way you can build up your credit, you could re-establish credit, show the banks, and show the bureaus that you can pay back your monthly payments consistently. While you're doing that, your credits going to go up, and while your credits going up, that means your ability to qualify for a loan at less interest. So a less expensive loan for you is going to be higher. That's the goal. Is to get you to where you can qualify for a 0% loan.


Shotgunning Credit

That's what the dealerships will do. When you go into the dealer and the salesperson asks you, hey, let's do your credit we can figure out where you're at. Make sure that he understands and explained to him that, "I do not want to be shotgun. Go in there and tell your manager that I do not want to be shotgun" 

What shotgun means is, you fill out your credit application, they take it to their desk manager, the desk manager sends it out to a bank. That's what normally would happen if you have really good credit. Maybe two banks. But when people don't have the best credit, what they'll do is they'll send it out to 15 Banks, they'll send it out to 20 banks, they'll send it out to 25 banks. And what does that do? Each one of those banks is going to check your credit. Each one of those banks it's going to show as hard inquiry on your credit bureau. The more hard inquiries you have on your credit bureau, it drops your score, it plummets your score. So do yourself a favor, when you do the credit application if you don't get pre-approved ahead of time, and you walk into a dealership, make sure your sales professional knows, "don't shotgun my credit". 







Conclusion

If you have a $20,000 loan that's at a 10% interest rate, and it's a 72-month term. If you make one extra payment per quarter. What I mean by that is every three months you make one extra payment. In the third month instead of making a $300 payment, you make a $600 payment. That could be a little hard for people especially if you're tight on your budget. So what smart people will do is they'll take that $300 monthly payment and they'll divide it by 3. If you take that $300 divided by 3, you take that extra $100, and instead of making a $300 payment, you make a $400 payment. And by doing that, you're gonna cut your term, your interest in half. Instead of paying off that car in 72 months and paying the full amount of interest that the bank's going to click on you. You're gonna slice that right in half. You're gonna have that car paid off in 36 months. And not only that but instead of paying 10% in interest. you're only gonna pay 5%. And that saves you more money, and that more money you can redirect that and use it for whatever you want

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