If you’re reading this, there is a chance that you have a less-than stellar credit score.
LET’S BE CLEAR
In discussions related to financing, the circumstances behind your subprime credit score are drastically less important than the glaring 580 that is currently discouraging most lenders and dealerships from giving you their attention. Please understand, it is not their intention to question or cast doubt upon the validity of your circumstances. Simply put, your favor in the eyes of any creditor is driven solely by how you are viewed through FICO-colored glasses.
Unfortunately, financial institutions are as blind to the urgency of your immediate needs as they are to your circumstances. So, with all due respect to any cash-flow struggles resulting from your recent unemployment, long-term medical issues or unexpected home repairs – we owe it to you to say it like it is – numerically speaking, you are now grouped in with the chronically delinquent.
Wow. That’s a little bit uncomfortable, isn’t it? I mean, “You: Good, Banks: Bad” right?
Understand this: banks, mortgage lenders, and car dealerships WANT to finance you. After all, it just makes them more profitable; plus investments in homes, business, and cars are the cornerstone of our global economy.
So, put down those tissues, because this “Pity Party” is over.
THE DANGER OF ENTERING INTO SUBPRIME FINANCING
We understand that you want, or possibly have an urgent need for a vehicle, but you should actually find some relief in an institution’s hesitance to finance you at this time. While a bank’s decision to withhold financing is based on sound business concerns relating to your potential inability to repay it, what would it mean to you if they actually did finance you?
As noted above, your 580 credit score is defined as “subprime” because it falls under the industry’s “low standard” of 620. Since APR is relative to credit score in determining the financed party’s ability to repay financing, your lower score will increase the interest attached to your loan. This ensures that the financier is able to recoup their loan faster, reducing their risk in loaning you the money. Makes sense, right?
Well, let’s say that you were trying to buy the same vehicle as someone with an excellent credit score of 780. Based on their score, they could purchase an $18,000 vehicle at 3.336% interest. With a monthly payment of $326, they would pay a total of $1,568 in interest over the life of a 5-year loan, making the total vehicle cost $19,568.
At your current score, the same vehicle would be financed at 14.806% interest, making your monthly payment $426. As the total interest paid over the life of the loan jumps to $7,583 your total vehicle cost reaches $25,583.
Taking your circumstances into consideration, this would do little to improve your financial situation. To a struggling household, the difference of $100 per month could impose an additional financial burden, increasing the likelihood of further struggle and greater risk of delinquency. You can argue all day long about how unfair it is that financial institutions are designed to protect the wealthy, but you could also argue that discretionary refusal of financing can help protect your long-term interests.
(I know, it’s a stretch. But still…)
BUY HERE / PAY HERE
Many dealerships offer Buy Here / Pay Here (BHPH) programs, meaning that they are willing to finance prospective buyers who are considered “unfavorable” by traditional lenders. This is either facilitated by the dealer themselves, or with the support of a 3rd party group specializing in high-risk financing. While the reputation of dealer financing is not unblemished, there is no arguing the growing need for support of the disenfranchised. (After all, accessibility of transportation encourages both employment and commerce, which benefits everyone, right?)
Less concerned with credit checks (and, in turn, your 580 credit score) such dealerships focus on a buyer’s overall budget, available down payment and/or trade-in. This is a key basis of dealer-financing, as it helps the dealer to cover their own exposure in lending to customers traditionally viewed as high-risk. Ideally, the buyer should plan on a minimum down payment of (or a trade-in value equal to) 20% of the sales price. From a dealer perspective, the goal is to obtain a down-payment anywhere from 90-115% of the profit margin associated with the sale of the vehicle. Through this, BHPH dealerships meet their obligation to protect their own interests, as well as those of the financial institutions that support them.
While financing options can be in-line with local banks and credit unions, a buyer should still expect a higher interest rate and extended loan terms (compared to those they would be eligible for with a better FICO score). After all, the “favor” granted by BHPH dealers isn’t a more manageable APR, lower monthly payments or reduced financial burden. They are simply willing to finance someone when other lenders aren’t.
For this reason, it is imperative that customers fully understand the conditions of the contract they are entering into. As with any financial contract, they should be aware of all fine print and fees associated with the agreement. The combination of confusing wording (or “Legalese”) with hidden, or undefined “administrative” fees can prove surprising to a buyer who has not performed their due diligence. Such review should include clarification of the inclusion, or absence, of any warranty associated with the vehicle.
Buyers may also find themselves more limited in terms of options. A dealership may assist a well-qualified customer in a sourcing a specific vehicle, that meets every item on their wish-list, even if it is not currently on their premises. That said, a buyer relying on dealer-financing is most likely limited to those that are currently present on their lot.
While examination of such programs may cause them to appear restrictive, it’s important for all consumers to understand the options available to them.
GIVING CREDIT WHERE CREDIT IS DUE
An added benefit for many buyers is that most BHPH dealers report to the Credit Bureau, meaning that a buyer can use the purchase as a means of rebuilding their FICO score. While we’ve cast a critical light on the overall process, BHPH programs exist as both a helping hand and a stepping stone for those customers who have faced hardships.