Evaluate your options and incentives. Remember, you are buying the financing.
If you want to get approved at the best possible terms when buying a
car, it's important you know a car lender's credit guidelines before
you apply for credit...especially if you're bankrupt.
It will save you time and frustration—but more importantly, it will
help you avoid credit inquiries that may lower your FICO credit scores
up to 12 points per inquiry.
Step 1 in making a lease or buy decision is to determine a lender's credit guidelines.
You start by asking if they lend to people with a bankruptcy. If so, on what terms?
That's right. You have to be upfront that you've filed bankruptcy.
Don't hide it. We have to face the fact that some dealers just won't
work with people who've filed bankruptcy. So our job is to find the
ones that do.
Some lenders will only lease to people with a bankruptcy. Others will
only offer purchase financing. Yet still others will only lend using a
hybrid of the two—this is especially common in Texas.
Ask the finance director at the dealership to direct you as to what structure the manufacturer prefers.
And here's a quick tip for you: if your bankruptcy doesn't appear on
the credit report your lender pulls—then, in the eyes of the lender,
you're not bankrupt.
The only lenders I would consider using are:
- First choice: Captive lenders (car manufacturers)
- Second choice: Banks (not finance companies)
- Third choice: Credit unions
Ninety-nine percent of the cars I've leased over the years have been with captive lenders. Just one was leased by a bank.
That particular deal came from a conversation I had with Amy, the
finance manager at the local Land Rover dealership here in
Indianapolis. I told her I was open to her financing recommendations,
but I preferred financing through the car manufacturer.
I told her my current FICO scores. She immediately said that with my
scores she could do better through a local bank. I signed a credit
application and told her to go for it.
The next day I signed a lease agreement with that local bank. Being
open to her advice literally saved me hundreds of dollars a month on
that car.
So be flexible...but be careful. It seems most car dealers call all of
their funding sources banks. When in reality some are banks, some are
credit unions, and most are sub-prime finance companies.
Here is a list of some of the most commonly used sub-prime auto finance companies:
1. HSBC Automotive
2. Capital One
3. AmeriCredit
4. WFS Financial
You want to pass on the sub-prime finance companies—unless you have
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 do you find out if a credit union reports to
all three credit reporting agencies?
Simple—you ask. Ask the branch manager at the credit union if they
report. And after you get the loan, check all three of your credit
reports and make sure their trade line appears on each one.
The three worst luxury captive lenders to lease or purchase from after bankruptcy are:
1. BMW
2. Mercedes
3. Porsche
The three worst mainstream captive lenders are:
1. Honda
2. Kia/Subaru
3. Toyota
What makes these the worst?
Once these lenders see that you've filed bankruptcy, they are less
likely to work with you. However, if they are willing to work with you,
they'll want you to be at least several years from discharge and have
perfect credit during that time.
Now that I told you how bad the above six lenders are—there are times
where they may offer you good deals. For example, if one of the above
happens to be the biggest dealer in your area, they may be able to
offer you special deals that a smaller dealer can't.
Of course, things change all the time with captive auto 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—just don't get your hopes up too high.
OK, so you've done your research and narrowed down your choice to one or two car manufacturers.
Step 2 in making a lease or buy decision is to purchase your FICO credit scores.
It's important you have your most recent scores when you talk to car dealers (just like I did with Amy). It puts you in charge.
When you enter a dealership with your FICO scores, the dealer will know
you're a more informed consumer and cannot be taken advantage of. Just
know that the FICO credit scores auto dealers use are a little
different than what we see as consumers. The scores the dealers review
are called FICO Auto Industry Option Scores. The good news...these FICO
scores may be higher than your normal FICO scores if you paid all
previous auto loans as agreed.
Some car dealers have told me that if your FICO scores are higher than
the scores the dealer reviews—they may even use your scores to get a
better deal.
You can buy your scores from myFICO.com.
Step 3 is to interview the remaining car dealers on a deeper level.
Start by asking them these questions:
- Which credit reporting agency do you use to make a lending 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 offering lease or purchase financing to a bankrupt debtor?
- What incentives are there to lease or purchase right now?
At this point it's important to remain open to either leasing or
purchasing. Evaluate your options and incentives. Remember, you're
buying the financing. In other words, the most important factor is the
willingness of the lender to loan you money.
I personally view the lease versus buy decision in three ways:
1. If you're recently recovering from bankruptcy, the only thing that
matters is if you can get approved at an interest rate you can afford
through a lender that reports to all three national credit reporting
agencies. So you should only consider lenders that are bankruptcy
friendly.
2. Once your credit scores begin to increase, you can start selecting
cars based on which credit reporting agency the lender uses to
determine if you qualify. Obviously, you should choose the lender who
uses your highest FICO credit score to make a lending decision.
3. When your scores are high enough...or two years have passed after
your bankruptcy...or your bankruptcy doesn't appear on the credit
report the lender uses, then you can choose almost any car you like.
But make sure you still do your research and use your credit scores to
help you compare interest rates, terms and incentives.
