There Are a Number of Things You Shouldn't Do if You're Trying to Buy a Car With Bad Credit
Image: NCCC

There Are a Number of Things You Shouldn't Do if You're Trying to Buy a Car With Bad Credit

car shoppers who have bad credit unfortunately mean dollar signs for unscrupulous car dealership staff trying to take advantage

May 4, 2021

Unfortunately, it's a fact of life. Not everyone out there has a great credit rating and not everyone has a good credit rating. Even if you have really bad credit, you can still make purchases on credit but for a heavy price. If you are one of the unlucky people with bad credit and you're in the market for a new car, there are some things you should never do or you'll find yourself deep in a hole.

Verbal Promises are a dime a dozen and disappear in a flash

You should never rely on verbal promises as part of the deal. Verbal agreements and handshakes may have worked in the 1950s, but they don't fly today. Remember that sales staff are human and not everyone is honest. Some will lie to you about anything in order to get you to sign the deal, whether it be about a particular vehicle option or the sales terms on the car. If you have bad credit and the sales staff know it, they may be tempted to fib about financing terms to get you to accept terms that are better for them and worse for you.

Don't drive away in your new car with financing up in the air

Dealers will often allow you to leave with a car knowing that the contract isn't final, often telling you that you are signing a contract that is subject to approval rather than a binding agreement. This is done in case the dealer can't find someone to buy your financing, as well as to get you to fall in love with your new car before you get the phone call a day, week or month later telling you that your financing wasn't approved. You can then get suckered into accepting higher and less favorable financing terms in order to make more money for the dealer.

Don't fall for yo-yo auto scams

Obviously, dealerships are not in the business of lending money and they will tell you that your financing fell through and that you must return the car. If a dealership ever calls you back and says that you must return a car and you have a signed legally binding contract, stop right there! That's a yo-yo auto scam. Consult an attorney and the North Carolina Attorney General's Office for legal device. In almost all cases, the dealerships must own up and fork over large sums of money for the violations of the contract. A dealership can have you bring a car back if your contract clearly states that your financing is not finalized and that the contract depends upon the ability of the dealer to secure financing for you.

Don't walk into the dealership blind

Don't walk into the dealership blind. If you walk into a dealership without knowing the average rate for your type of credit, you can be taken for a lot of money. If the average rate for your type of credit is 10% and you don't know it, the dealership personnel will take advantage of it. They will be able to convince you that you must accept an interest rate much higher than what you can really get. It is often best to go into these negotiations with a blank loan check in-hand or with preapproval where the financing terms are already known to you. Then you can compare apples to apples. Very often you can get a better rate from the dealer if you already have a specific rate approved for you.

Avoid Precalculated Interest Charges

Avoid any type of loan with precalculated interest. Unfortunately, those of us with bad credit usually get a loan with precalculated interest. In these types of loans, payments go solely for interest for as much as half or even the entire life of the loan. If you try to pay off the loan or refinance, you might be shocked to see that the loan balance has not gone down any or has even increased. Stick with a traditional loan.

Decline loans with prepayment penalties

If your credit is really bad and you need to accept a loan that includes prepayment penalties, be prepared. If you pay off the loan early, refinance or trade it in later, you'll have to pay an additional fee. Know ahead of time what these charges are so that you don't have any surprises when you pay off the loan. The charges might be small or they might be quite large. Some large prepayment fees are designed to keep you paying a lot of money on interest charges.

don't get a line of people who will cosign your loan

Dealership staff will hustle and bustle to get you approved if you have the worst possible credit. After all, if the car doesn't sell, they don't make any money. It's a common practice for dealership staff to encourage you to get a cosigner for your loan if you don't have the best credit. If dealership staff are pressuring you to start naming anyone from your parent or spouse to distant relatives as cosigners, walk away. If you truly need a cosigner (or two) to get the financing, your credit situation might be much worse than you think.

the tricks of the sale: how to buy a new car without getting taken

We have a separate article about buying cars that you might find interesting. Check it out if you're in the market for a new car, whether or not you have bad credit. It tells all about some of the common tricks used by car dealers to make you spend more money. It even talks about how the financing process at the dealership really works. Did you know that the dealership is your first lender when you sign for the car?

Credit Unions give it to you straight and for better rates

Whether you have bad credit or even great credit, talk to someone at a local credit union. Credit unions are typically better than banks as far as rates and customer service. And since credit union staff aren't making any money from your lending, they have no incentive to lie to you and will give you honest and sound advice about your credit situation.

They will look at your specific credit situation and will tell you truthfully how much car you can afford. As part of the financing process, you can even look at the rest of your credit situation and start a plan to consolidate your high interest debt to get on your way to a better credit rating. Since each credit union is different and specializes in different types of credit, don't stop with just one credit union. You may find that you get a great rate at one credit union on a car loan and a great rate on credit card consolidation at another one. It costs you nothing but your time to check them out.

The North Carolina Consumers Council has partnerships with a number of credit unions that you are eligible to join. We recommend that you check them out. Some of them even have their own car buying services that are usually free and take the stress out of buying a car. The credit union will find the car you want, negotiate the price for you and set you up with financing. It really could be a lifesaver, especially if you think you might fall for some of the gimmicks used by the sales staff.