Buying a Car with Bad Credit - What NOT to Do
Don't, and we mean don't ever drive off the lot until your financing terms are set in stone. Drive your old clunker home or take the bus if the financing is not complete at day's end.
One common shady practice dealers engage in is to let you leave the lot with a contract that isn't final. In this underhanded routine, you sign a financing agreement "subject to final approval" rather than a binding deal. The dealer then lets you take possession as though you had a binding agreement.
You drive off happily in your new car, then get a phone call telling you that the financing wasn't approved. You go back to the dealer and are then slapped with a much higher interest rate than you'd originally expected. This is a nasty trick. Don't fall for it.
Don't rely on verbal assurances. Many people, especially those with bad credit, are hustled by dealer finance managers who smooth over ugly parts of a finance contract.
One ConsumerAffairs.com reader wrote to us to say that a dealer first tricked her into making her roommate a co-signer, then left the two with a loan for which the roomie was primary borrower (overextending the roommate's credit, tangling her legally and ruining the friendship). All along, the dealer had told our reader that the roomie was not being listed as the primary borrower. These kind of things can happen to you easily if you take someone's word at finance closing time.
Know the market. Don't accept a finance contract without checking to see what the going interest rate is for your credit category. Dealers may try to psych you out by throwing out an extremely high interest rate number and insisting that's the best they can do.
The truth is, they're tacking on several points of interest onto the loan over what the bank offers, and pocketing the difference. And the more desperate you seem, the higher interest number they're likely to quote. While a dealer will almost certainly add some additional interest to the
loan, you don't have to let them get away with financial murder.
To get a real-time snapshot of average car loan interest rates for your FICO score, use the loan calculator available at MyFICO.com. That way, you'll have a good idea of whether the lender or dealer finance manager is in the ballpark.
Skip the extras. Don't sign up for add-ons like extended warranties, GAP insurance or credit life policies. They generally aren't worth what you paid for them. And no matter what the dealers tell you, you are not legally required to purchase them.
"The finance manager will state that these will only cost you an extra $5-20 per month, and that you'll never miss it, but since you are paying interest on these rip-off insurances, it may cost you as much as $1,000 over the course of your loan," says Richard Krawczyk, Ph.D. author of "Financial Aerobics - How to Get Your Finances into Shape."
Make sure you know whether your loan interest is precalculated. In far too many cases, people with bad credit end up with a loan where the interest is pre-calculated. When loans have pre-calculated interest, your payments may go solely to interest for as much as one-half of the life of the entire loan.
Try to retire the loan early, even to refinance, and you may end up owing much more than you thought. Don't get a rude shock -- while you may be forced to take out such a loan, be very clear up front what you're facing.
Watch out for penalties. Know whether there's a prepayment penalty written into your contract.
Depending on how bad your credit is, you may want to go ahead and accept a loan that includes prepayment penalties. But be prepared: if you pay the loan off early, you may face an additional charge of $25 to $200. This may or may not be significant to you, but it's best not to face any surprises at payoff time.
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