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Buying a car with no credit or bad credit presents some serious challenges. Most people need a car for work and life and many of those need to finance the purchase of a car. If someone is trying to buy a car and has not established any credit history or has a credit history full of late payments and defaulted loans, qualifying for a car loan can be difficult.
Car buyers with no credit or bad credit often require the use of some crafty techniques on the part of the finance buyer at the dealership or used car lot. The goal of someone with either problem should be to buy and finance a car he can afford and start building or rebuilding a credit history. As you move through life, building a history of good car credit will allow you to purchase more cars in the future with better terms.
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Buying a Car With No Credit
The no-credit buyer is usually a young person that has few bills and the only established credit may be a credit card and a cell phone bill. If this buyer has not recently graduated from college, getting a car loan will most likely require a co-signer on the loan. A co-signer is someone with established, good credit that the bank will also hold responsible for the repayment of the loan. A parent or other close relative often is the co-signer for someone's first car loan.
Recent college graduates can qualify for special discounts and financing at dealerships for most of the major car manufacturers. Check the manufacturer's website or call a local dealership and ask about programs for recent grads. Different manufacturers may offer rebates and low down payment loans or leases.
It is important for the no-credit car buyer to have a job. Be ready to bring pay stubs to prove your employment and income. Money for a down payment will make it easier to get approved for a car loan. Keep in mind that just a debit card and a cell phone doesn't mean you have credit and in the car finance industry, you're often seen as a "ghost" or a person with no credit.
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Buying a Car With Bad Credit
If you have a job and some money to use as a down payment, it's possible to get a car loan for most people in bad credit situations. Car dealerships, new and used, will have access to lenders that make auto loans to individuals with poor credit histories. The point to remember is that the bad credit buyer is somewhat at the mercy of the lender, not the finance person at the dealership, who usually will make every attempt to get a buyer with bad credit into a vehicle.
The key to financing a car for the bad credit buyer is the loan to value ratio. The lender does not want to finance more than they can sell the car for at auction if it has to be repossessed. The choice of cars for a poor credit applicant will be limited to new cars with large rebates that can lower the loan amount, or used cars that the dealership owns for significantly less than book value. The buyer's down payment money can also reduce the loan to value and open up the options for available cars.
A dealership that is active in poor credit car sales will know what cars and what financing a buyer can qualify for based on their credit history. A buyer in this situation has little room for negotiation and the best option is to shop at several dealerships and see which one puts together the most attractive package.
A co-signer does not help with a bad credit buyer. A car dealership wants to sell a car to everyone who visits the dealership. Bad credit buyers present problems to the dealership that often can be solved in a limited number of ways. The buyer must look at what the dealer is able to offer and decide if the car, down payment amount, and monthly payment are acceptable.
Buying a car with no credit, or bad credit is possible but be prepared for either a very high interest rate, a longer term to lower monthly payment obligations or the possibility of obtaining a co-signer.
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- Young Money (accessed 8/4/10) http://www.youngmoney.com/auto_shopping/261_92/
- Car Buying Tips (accessed 8/4/10) http://www.carbuyingtips.com/bad-credit-auto-loans.htm
- The Washington Post (4/7/06) http://www.washingtonpost.com/wp-dyn/content/article/2006/04/06/AR2006040600024.html
- Car (Morgue File)
- Bad Credit Car Loan (http://www.flickr.com/photos/31233226@N08/3316938173/)