Buy Here-Pay Here vs Subprime Car Loans
Cars are practically a necessity (unless you live in a large city), but it’s sometimes hard to afford even the least-expensive vehicle. Luckily, there are a number of steps you can take to assure that you won’t have to rely on a buddy to take you to and from work. Unfortunately, some of these options may be limited by your financial situation.
Even if you have an awful credit score, it’s not impossible to get a car loan. However, bad credit means an unfavorable interest rate, and that subsequently means a higher monthly payment. There aren’t many ways around this predicament, but it at least helps to understand the process. Before you head down to your local buy here – pay here dealership in Cincinnati, check out our guide below…
Nonprime/Subprime/Deep Subprime Loans
If you’ve determined that a car is out of your price range, your first option is to seek a loan. While this task is significantly more difficult when you have poor credit, it doesn’t make the task impossible. In fact, there’s a system set up for those with ugly credit reports, and it apparently works. Experian Automotive reported that 28-percent of new-car buyers and 54-percent of used-car buyers had credit scores lower than 660, the number seen as the cutoff when determining whether someone is a credit risk.
If your credit score is in fact below 660, there are three categories that you could be grouped in: nonprime (for borrowers with scores between 601 and 660), subprime (scores between 501 and 600) and deep subprime (scores below 500). Subprime and deep subprime buyers accounted for 32-percent of used car loans and 10-percent of new-car loans in 2014.
That Experian report showed that nonprime buyers paid an annual interest of 9.29-percent, and that number jumped when you go to subprime (15.72-percent interest) and deep subprime (19-percent interest). Matt Jones of Edmunds.com notes that these numbers drop about six-percent for new-car loans. As the writer notes, it’d still be difficult for a borrower to get their month payment below $300, as a nonprime loan on a $16,333 would require a $341 monthly payment. If you’re a deep subprime borrower, you’ll have to get that loan amount down to about $11,500 (which would require a $299 monthly payment).
You’ll want to start off your journey at your preferred money lender, whether it be a bank or credit union. If neither of those venues work out, you could always approach your credit card company, as many offer auto loans. If this is the route you have to take, choose a company that you have a previous relationship with. If that doesn’t work, you’ll have to approach your dealership and see if you can get a loan approved. As Jones writes, many dealerships have a group of “dedicated personnel whose job is getting subprime and deep subprime loans approved.” It may not be the ideal way of securing a loan, but when your credit is struggling, you have to take what you can.
Buy Here – Pay Here
If you’ve exhausted the options above, your next course of action is to visit a buy here-pay here dealership. This financing option is available for those who can’t get a loan from traditional (and even some less traditional) lenders, requiring them to rely on a dealership as a type of finance company (as Russ Heaps of AutoTrader.com explains). Since these businesses often want to push their cars and capitalize on the interest they’d be charging, it’s a practical certainty that your loan will be approved.
With this route, a potential buyer’s options are limited, as the dealership will prioritize the financing before they talk cars. Once the dealership determines how much money they’ll lend the borrower, you can start talking cars. Of course, you’ll have to operate under their assigned budget, making the task even more difficult.
There are some positives with buy here-pay here dealerships, however. As long as you make your payments on time, you can slowly repair your credit history. This would be true of any loan, but the cheaper monthly payment should assure that you’ll never be late. If this is one of your main intentions for buying from such a buy here-pay here, you’ll want to ask your dealership to report the payments to the credit bureau.
Furthermore, the dealerships will be much more likely to accept an old car as a down payment. Even if you’re looking to swap in your beater car, there’s a good chance that it’ll be accepted.
What Can You do to Prepare?
To start, saving up money for a down payment is a good idea, regardless of your credit situation. Many lenders will require a buyer to pay at least $1,000 when they’re purchasing a car, but having the ability to pay more means you can reduce your monthly bill. The more money you can put down, the more serious you’ll look about purchasing a specific car. As Jones writes, using a trade-in vehicle as a down payment could further help your cause.
There may be a situation where your financial situation changes for the worse, and if this happens, it’s not a good idea to just skip out on your payments. Contact whoever issued the loan and see if you can agree on a lower monthly payment. Many companies might be willing to accommodate you, but you’ll also be sacrificing more money in the long run.
“The most important thing they can do is keep communications going with the lender,” Martin Less, the president of Nationwide Acceptance, told Jones. “Let the lender know what the circumstances are and lenders will generally work with the customers through temporary problems.”
As you can see, securing an auto loan or approaching a buy here – pay here dealership isn’t the end of the world. It may limit your options, but it certainly doesn’t prevent you from purchasing a car. If you recognize that a buy here – pay here dealership is the correct route for you, head down to McCluskey Automotive in Cincinnati. The helpful staff will find you your perfect car within your budget.