If you find yourself in the position of buying a car with bad credit, then there are some very important do’s and don’ts that you’ve got to keep in mind.

First… don’t ever let the dealer or salesperson put you in any car until you have completed all the financing paper work and the terms of your bad credit car loan are approved and locked down tight.

Keep your old car, take a bus, ride your bike… whatever… just don’t take the car you are looking at home until the deal is done… and I don’t mean the sales person telling you it’s a done deal. Buying a car with bad credit should raise buyer beware flags for you because you can be a huge profit center for a sales person and dealer.

Letting you drive off the lot with your car when your car financing hasn’t been approved is called a “spot delivery”. Dealers engage in this all the time, because they want the sale and they want you to fall in love with your new car. Although a common practice by car dealers, it isn’t the best thing for you to do if your buying a car with bad credit.

If you drive off the dealer lot thinking all is well, it might not be. You may get a call telling you that the dealer couldn’t quite get you approved and if you want to keep the car that you thought was yours, you’ll have to either pony up a bigger down payment… which you probably can’t… or you’ll have to sign off on a much higher interest rate… chaa-ching for the dealer… so don’t fall for this… especially if you’re buying your car with bad credit.

Bad credit car buying customers represent a bit more paperwork for the car dealer and car salesperson, but they also can represent windfall profits and sales commissions if the buyer is unsuspecting.

This is why it is critical for you to not only know your credit rating but also know what you qualify for and what your interest rate will be even with your bad credit. When you’ve got credit problems, salespeople will routinely try to push your interest rate up telling you that is the best they can get for someone with such a credit history; when in reality they are trying to maximize their profit by adding points your car loan which is profit for them. And when buying a car with bad credit, the more desperate you seem, the more points they may try to add to your car loan.

So… know the market and don’t accept auto financing without knowing what the interest rate is. period.

When you’re buying a car with bad credit, you’ve got to skip the extra’s that the dealer will try to sell to you. Again, these add-on’s represent nothing more than big profit for the dealer and commission for the sales person… so take a pass on these. The car dealer’s finance manager will work the angle that these extras will only cost you another $5-$10 per month… but don’t take the bait… since you are already paying a higher interest rate with your bad credit, these ‘little’ extras can mean thousands over the life of your loan.

Make sure your payments are going to be applied to the loan. Many people face the problem of interest rates that are pre-calculated which means you payments may just be going to the payment of the monthly interest while very little is being applied to the loan itself.

When buying a car with bad credit, the key is to get all the information you can upfront and before you go to the dealer. Get your credit report and shop your loan on-line in order to gain insight into what the market is for someone in your position.

Buying a car with bad credit doesn’t mean you have to be at the mercy of every shady deal out there…. but you do have to be aware.

What is that?

In the vernacular of car dealers the back end part of the deal takes place in the finance manger’s office (F&I).

If you know nothing else about this part of the car buying process, know that the F&I person at the dealership is a sales person. Their job is to sell you products. Their job is to get the highest interest rate on your car loan that they can with sending you running out of their office.

They are responsible for the profitability of their department. If their sales don’t meet management and ownership’s demands and goals, they will eventually be fired.

Again, just so you have no question, the F&I manager is not your friendly financial advisor making sure that your money is most efficiently spent.

The point here is, and this is where many people give back much if not more than what they gained on the front end of the deal, don’t relax at this point in your car negotiations. If you do, it will cost you money. In fact, stay focused and in negotiating mode.

You may even come across salespeople and F&I people that may imply that in order for you to get the deal that you worked hard to negotiate on the front end of the car deal you have to do your financing through the dealership.

This is NOT true.

In fact, as a student of this website, you have already done your financing homework and know exactly what your credit score is and also how much money you qualify for and for what interest rate. And since you have done the aforementioned, you can now hold the dealership’s feet to the fire and let them know you would be happy to finance through them is they can indeed provide you with the best (or better) terms than you already know you can get.

Make sure you read the contract. I know, this sounds way too basic of advice, but you would be surprised how many people don’t do this. Also, make sure that anything that you have negotiated during the front end part of the car deal gets put in writing.

If, for example, you negotiated a year of free car washes or something such that made you feel good about the deal, make sure you have it in writing and signed before you sign any contracts.

In summary, just to be perfectly clear, the F&I office is another opportunity for the dealership to sell you something, and sell you something at a good profit. Anything they try to sell you, including interest rates, has dealer profit and sales commission in it.

Therefore, any of these prices are open for negotiating.

Stay focused, you’re almost done once you hit the F&I department at the car dealership… don’t give all your hard car buying and negotiating work back at this point.

Wrong!

Car dealer financing and what goes on in a dealership’s F&I (finance and insurance) department was a no brainer for me when thinking about some of the most common mistakes people when it comes to car buying.

A dealer’s F&I department can be a wonderful source of profit for the dealership.

But, let’s back up one second. For some reason, there is a great many people that don’t consider the financing or the cost thereof, part of the cost of ownership puzzle, or part of getting a good car deal.

If you don’t… then do, or you’ll make many a car dealer very happy to see you coming.

I guess it’s because you don’t actually ‘see’ this money leaving your checking account each month. After all, it is hidden inside your car payment.

Take a look at the impact of interest rates and what you’ll be forking over, over the length of your car loan. And it you are car financing with bad credit on your side, the financial implication can be very hefty.

Take a moment to do this. Go to our monthly payment calculator and just to give yourself a wake up call…

plug in a $20,000 loan for a car for 5 years at a modest 4% interest rate. You’ll note that your payment comes to $368.33. Now change the interest rate to 8% and you’ll see your monthly payment change to $405.53.

A difference of only $37.20 month. Hey, that’s only one night less a month to go out. Right?

Well, take your 37.20 times your 60 month loan and the difference between the two interest rates is a hefty $2232.00!

Shop your interest rate! Let me say that again. Shop your interest rate!

Start by getting (and knowing) your credit score. A great resource that you may be familiar with is Equifax Credit Report.

Even if you have some difficult credit, shop your interest rates. Sure, they’ll probably be higher, but there is not reason for them to not be competitive relatively speaking. Automotive.com and 1800AutoYes.com are very good resources.

Here’s the part about car dealer financing and what I am constantly amazed at when discussing this with people.

Many people don’t realize that when they get quoted and interest rate from a car dealer’s F&I person, they are being quoted an interest rate with a point or two… or three added onto what the dealer can actually get the money for.

That’s right.

Even you of immaculate credit ratings. If the dealer can get you to sign the financing contract at 8% and they can get the money for 6% they have just made a very nice dime on your ignorance, laziness, or whatever.

And the numbers used here don’t matter… just pick a rate. If I loan you money at ‘x’ interest rate when I can get the money for ‘x’ minus ‘y’ interest rate, then I am going to make some money on financing you!

Knowing how much you qualify for and what that interest rate will be over the term of the loan is a must when car buying!

Besides saving yourself money on your car deal, having this knowledge during the car dealer financing part of the car buying process will allow you to tell the car dealer to beat what you’ve got.

And you never know… they may be able to; saving you even more!

Next Mistake Shopping Only Car Dealerships Nearby

We talked about the car financing piece and some tips to consider on extended vehicle warranties.

Let’s discuss the insurance part of the F&I department at the car dealer.

Finance managers at car dealers will also push for you to buy insurance policies such as gap insurance.

Gap insurance pays you if your car is stolen or totaled and you owe more than the car is worth.

Let’s say for instance that the difference between what you owe on your car is $5,000 more than what your insurance is will to pay for the market value of the car. This isn’t an uncommon situation for anyone these days to be in with all the creative financing available to dealers. This coupled with the depreciation rate on cars and unless you put a good bit of money down on your car you are probably at this type of risk. If you are, then Gap insurance would cover the cost of your difference.

In some instances Gap insurance could be quite appropriate for you. However, check exactly what your insurance coverage offers you. You may already be covered or be able to add this insurance to your current policy.

WRONG!

That is if you are about to be accompanied in to meet the car dealer’s F&I (finance & insurance) manager to sign everything and wrap it up.

Just a mere formality?

Hardly.

A car dealer never stops looking for an opportunity to sell you something an therefore make some additional profit.

The F&I guy/gal is no exception.

In fact, the manager and ownership of the car dealer expect… no … demand of the F&I person that they hold up their end of the automobile sales process and generate sales for the dealership.

In fact, be advised that if you work hard on the front end of the deal to get not only the price you wanted for the new car, but your trade in as well, I can assure you that the dealership will be looking to the F&I person to re-maximize the profit for the dealer.

In fact, in most cases, much of the front end negotiating and haggling over the car and the trade in has been done mostly with handshake agreements. In the F&I department, the ‘deal’ gets put in writing in the form of a legal document or contract. So now is not the time to lose your tenacity or your focus.

Some dealers may give you the impression that in order for the deal to go through you have to arrange for the financing through their F&I department.

This is simply not true.

If you are a student of this website you already know what financing terms you qualify for and it’s a matter for the dealership to try to do better than what you already know you have.

Even though you may be tired from the days car negotiations, do not take for granted that all you expect to be in the deal is going to make it to the F&I department. In other words, read the papers you are about to sign.

Be sure to understand the length of your contract as it relates to your payments. Remember, car salespeople will stretch the length of your contract as far out as they can in order to make your monthly payments seem much more attractive. This will cost you money.

If you happen to be considering an extended warranty (a service agreement that kicks in once the manufacturer’s warranty expires), keep a few points in mind.

First of all, there is nothing that mandates that you must purchase one at all.

Know what the original warranty covers… and more importantly what it does not cover. Most go for 3 years and 36,000 miles. Look for the manufacturer’s extended warranty before an aftermarket or 3rd party warranty.

The manufacturer’s extended warranty will be good throughout the country. A dealer offered or 3rd party warranty may have stipulations that you use only specific dealers for your repairs.

If you are looking a 3rd party warranty, make sure you understand the terms of their extended warranty coverage.

Next
Next… let’s look at a couple more products in the car dealer’s Finance & Insurance salesperson’s sales bag and what you can expect.

The dealer finance department is just another piece of the buying a car puzzle that you have to have fit.

The car dealer finance department is a separate piece that you have to stay on your toes when dealing with.

This is no time to relax and let your guard down. There is still a bit of work yet to do. You are only in this person’s office because, evidently to this point, you feel as though you have worked out acceptable numbers with salesperson and sales manager.

Not time yet to grab your car and go impress your friends and neighbors quite yet.

To relax and not pay close attention now could mean losing a good bit of ground you feel you have made to this point. In many cases the dealer’s finance person is the most experienced and skilled sales person you will come in contact with.

With the various products the car dealer’s finance person will present to you, it could mean a very nice profit added back into the deal. When you were hard at work dealing with the salesperson, negotiating the price of the car and your trade allowance, refusing to pay for all those dealer add-on’s, this is known as the front end of the car deal.

The finance department and all they have to offer…. er… sell you, is known as the back end of the deal. You can see by this the dealer doesn’t consider ‘the deal’ quite over yet, and neither should you. This is the final stop on the road to the deal, the last chance for the dealer to make a bit more money, so you can bet the F&I person is good at what they do.

There is great incentive (and potential profit) for the dealer have you finance your car using the dealer’s finance department. This is why it is extremely important that you know the interest rate that you can qualify for outside the dealer’s finance department.

The interest rate that is offered to the dealer from the lending institution is known as the dealer ‘retention rate’. You can rest assured that the dealership finance manager isn’t going to initially offer you up their ‘retention rate’ as your interest rate.

This is tantamount to selling the car for exactly what you paid for it. This is where knowing what you can borrow the money for from your personal bank, credit union, or other source, is of great importance. You can simply tell the finance manager that you can get the interest rate from your bank at x percent and that you would be willing to consider financing through the dealership if they could beat that rate.

Also, keep in mind that if you have no idea what type of interest rate you can qualify for, and perhaps your credit is less than perfect, then the dealer can mark up the interest rate to just about anything they can get you to buy into. Especially if you are still comfortable with those monthly payments! This can be a source of large profit for the car dealer.

Along with negotiating the interest rate the automobile finance department is tasked with selling you the extended warranty and disability insurance. Again these items make a very tidy profit for the dealer.

When it comes to extended car warranties you do have option of getting the coverage on your own and probably at a nice savings over what any dealership is going to offer you. Here are extended car warranty questions answered for you and how you can get a free quote.

Let’s take a look at the dealer F&I department…

As I mentioned earlier, getting your car financing set up through an online car loan rate is a valuable tool for you.

It only takes a few minutes, no application fees, and easy access. Even more importantly you now have a number that the dealer must beat in order to earn your business.

A nice advantage to have during the negotiating process.

So, it is very possible for you to get the cheapest car loan online. Even if you have bad credit there are online car loan businesses such as 1-800 AUTO YES that can help you get your car loan.

Your credit score is essentially a number that is assigned to your credit history.

This number is derived from many, many factors. The most obvious being your payment history. But, this is only a part of what makes up your total score. The higher the number the better your chances and the lower the interest rate you will be able to get your loan for if approved.

With this in mind, if your credit score is less than 600 (which wouldn’t be a good number) and you are get turned down, don’t keep submitting credit applications and getting turned down.

This will only continue to harm your score. One of pieces to that number is how many times you apply for credit over a given period of time. Keep in mind, the lower the credit score number means a greater difficulty in getting approved and if approved, the higher the interest rate of your loan will be.

Because of the importance of your credit score and the amount of money in interest rates that it costs you if your score slips, maintaining and nurturing your credit is an ongoing process.

The time to begin thinking about getting your credit in shape is not a few weeks before you head out to try to finance a car!

And lately when you hear about all these 0% to very low financing rates advertised and marketed by manufacturers and dealerships, you can be sure the ONLY way to qualify for these rates is if you credit is so spotless it shines.

So, if you don’t know your credit score, now is the time to find out what your credit score is.

Don’t come to the realization, that you have a nick on your credit, because a car loan you have applied for has been rejected.

In fact, to your knowledge you may have excellent credit and have something improperly reported that is harming your score. If so, you should dispute the entry and get it cleaned up before you begin applying for your car loan. This can take 60 days or even longer for the discrepancy to be removed from your credit.

And don’t assume you have an exceptionally high credit score just because you always make your credit and other monthly bill payments on time. This is only one of a whole litany of factors used to arrive at a score.

Your overall credit score and other information provided on your credit report are things that potential lenders take into consideration when you apply for a car loan. Such things as:

• how many accounts you have open (even if you don’t use them, and if you don’t close them)
• what are the credit limits of those accounts (this represents potential debt risk to a lending company)
• what is your debt to income ratio (I have seen six figure salaries get rejected because this was too high)
• how long have you been at one address (iterant people tend to make lenders nervous)
• How new of a credit user are you
• What type of job do you have and how long have you been there

So, to give your best shot at getting a good online car loan rate you should first get your credit in as good looking of shape as you possibly can.

• Get and know your credit score
• Close out any old and/or dormant accounts that you have just lying around on your credit report
• Check for and remove any information on your account that is not correct.
• If you have bills that have been charged off or in the process of, try to negotiate with the creditor to remove from your credit. If you have unpaid or charged off bills and don’t take measures to correct this, and you eventually do get a car loan, the interest you will pay on this loan may actually end up costing your more than if you would have just paid the bills.

While the first two points we discussed on car finance loans are fairly elementary, the third point many times is what gets people into difficulty when they opt to finance their car this way.

Automobile sales people are trained to find a monthly payment that they can get you to agree to.

Sounds innocent enough, but if work your way into your dream car negotiating monthly payments, you’ll lose…. and could lose big.

One of the ways is the amount of financing costs you’ll pay over the life of the automobile loan. Not to mention how much longer you’ll remain ‘upside down’ or ‘flipped’ in your car (more later).

So, even though those monthly payments may look attractive…. be very afraid… you should NOT be buying your next car based on where the dealership can get your monthly payments to land!

Buying time costs you money!

Buy your car based on how much you are willing pay for the car and how much you are willing to pay for the financing….. NOT based on a monthly payment. If you stay focused on the price and the financing and you have done your homework on your credit and interest rates, you will know what your monthly payments will be and you will know if you can afford the car.

Sometimes examples with numbers work better so perhaps it is easier for you to digest the numbers with an example.

Let’s use our $15,000 car financing loan at 8%. Now I know that 8% seems high with the going interest rate now, but I use the 8% as an average over the past several years and if you are financing a used car, you won’t get those super low new car rates that are out there at the time of this writing.

O.K. $15,000 at 8% over a 5 year loan will lower your monthly payments by $62 when comparing these same numbers to only 4 year automobile loan.

But, in financing circles, borrowing time is not without cost. The 5 year car loan in this example is actually going to cost you $672 more over the life of the loan than the 4 year loan!

Definitely something to consider when looking the financing costs. Time will cost you money.

With the price of new cars (and used cars) constantly rising, lending institutions along with automobile manufacturers have been forced to get more creative with their car financing options in order for you to be able to afford those monthly payments (but remember you don’t car shop based on monthly payments).

The most common way for dealerships to accomplish this is to offer extended time on their car loans. Today 72 months is not uncommon. WOW! Six years to pay off your car loan! And it will probably get even longer. Not for you….. right?

Now, let’s throw our old friend depreciation and the drop the car’s depreciation value into the mix here and take a look at how these longer financing periods with these very attractive ‘monthly payments’ are going to affect your financial position in the car.

Earlier, I tossed out a couple of terms; ‘upside down’ and ‘flipped’ in your car. I’m sure most of you have heard of these terms, but you need to take a hard look at this when you are financing your car.

Simply put, the longer the term of your car loan, it is going to take you longer, much longer to get yourself in a positive equity position in the car. Meaning the trade value of your car is actually greater than what you owe on your loan.

Remember, the goal is to get all the pieces to fit for you and the longer you stretch your ‘monthly payments’ out the longer it will take you to catch up with the depreciation cost on your car…… hence the longer you will remain ‘upside down’ in your car, the more the financing will cost you, and when you get the urge to trade for your next car the tougher it will be to do so….

and if you manage to roll your negative equity into your next car (and by the way, the dealer will be more than eager to give that a shot) you’ll be even further behind the car financing eight ball!

Let’s talk about getting the lowest car loan cost next…

You’ve done homework on the automobiles and you’re comfortable with the choices you’ve narrowed it down to.

Good for you.

Time to get out there and get started.

Nope. Not just yet.

Have you gotten your credit report yet? How do you know what type of car loan you will / can qualify for? And if so, what interest rate have you been able to lock into?

Before you even begin the actual legwork of car shopping get your credit report done. Period. No exceptions. Financing is a huge part of getting your best car deal. Don’t get started without this.

With your credit report taken care of, you should look at some of the very good online car loan resources as you go about getting the lowest APR on your car loan that you can. Today with the availability of online business, your auto finance application process is virtually legwork free and without application fees.

Great Car Rates is an excellent online car loan resource.

1-800 AUTO YES also does a very good job with any credit auto loans.

No matter what your situation, these are very good resources to get you online approval under your belt. Just get this done before you start shopping at any car dealership.

This is a crucial piece of the puzzle because once you have your financing set; then it becomes up to the dealer to beat what you have.

Car finance and loans next…

O.K. Let’s get something out of the way right up front about car financing. It can be very expensive for you and pretty darn lucrative for a car dealer.

I’ll get into actually negotiating the financing rate you pay a bit later.

For now let’s get some basic automobile financing information under your belt first.

It’s important to understand and determine what is an actual cost and what is not. If you purchase your car for cash (well if you do, you probably aren’t reading this) …. say for $15,000 then the cost of financing the car is zero…. easy enough.

However if you borrow that $15,000 from a lending institution, that lending institution will not only want their money back over a specific period of time, but they will also charge you interest on that time it takes you to pay back the financed amount plus the interest charge. The principal that they loan you (the $15,000) isn’t the finance cost….. the interest rate and the subsequent dollars that it equates to is.

Should you pay cash, take out a loan, or pay a percentage in cash and borrow the rest?

From a pure financial perspective taking on debt for a depreciating asset is never a good use of your hard earned money, but most of us need a car and most of us can’t afford to lop down a wad of cash for one.

That said, obviously the more you can put down to offset the cost of financing your car the better. It used to be (way back when) you could deduct the interest you were being charged on your auto loan from your taxes.

It’s true! ….. but never more.

So as long as the after tax interest rate on your car loan is higher than the after tax interest rate you can earn on your money – - – paying cash for your car is still less expensive than borrowing the money.

Determining the exact cost of your potential car loan takes a little bit of gonk-u-lating. There are a couple of factors that you should be aware of, or not forget about. For our purposes there are basically three basic constants when determining the cost of financing your car.

Now, I said they were basics…. so if you are an experienced car buyer this is a given…. but then again if you are experienced you would be gone by now…. so you guys and gals just beginning car buying here are the basics of car financing costs:

The higher the interest rate the higher your monthly payments will be. I know your thinking… Duh!? ….. But, here’s the deal. Sooooo many people buy a car based on the sales person getting you to agree to (really feel good about) a monthly payment range. First of all BIG mistake. Second of all, by the time you get into the F&I office for the signing of the finance papers, the F&I dude or dude-ett, now knows that they can push your financial envelop even further and bump your interest rate a point or even two… OR MORE! Yikes! And still be inside your ‘monthly payment range’ or just outside of it and still close you out. There goes a long drive…. the ball park isn’t going hold this one! Homerun!!! Finance Department. The higher the amount borrowed, the higher the monthly payment, the higher the finance cost of your car. Reread the previous bullet point. The longer the financing is stretched over time the lower your monthly payment….. and the higher the cost of financing your car.