We all know about the cliche sleazy car salesman, and how their antics can end up costing you significant time, money and frustration in what should be a straightforward purchase. But if you have bad credit, you’ll want to be even more cautious and prepared for your next car-buying experience. Here are some troubling tactics salesmen and lenders are using to run your finances into the ground.
Selling cars above blue book value
Ok, to be fair this can happen regardless of your credit. But if you’re already in debt, the last thing you want is immediate negative equity in a car. Having negative equity means that you owe more than the car is worth, and you’ll find yourself in this position immediately if you overpay. Don’t let a dealer prey on your lack of market knowledge. Be sure to know the value of any car you are considering purchasing. If you go to a dealership without a specific make and model in mind, make sure you take your cell phone with you to do on-the-fly research, or be prepared to firmly postpone any sale until you’ve had the chance to do some due diligence.
One of the best consumer resources is Kelly Blue Book, which allows you to check the value of the car based on its condition and other characteristics.
In addition to just overpricing the car, a dealer might try to “sweeten the deal” with unnecessary upgrades. If you’re being cost conscious, your budget may not have room for these upgrades, so be prepared to say no, and say it firmly.
Charging astronomical interest rates
Like with any debt, you likely know that the interest rate on a car loan is important. But if you have poor credit, a lender may see this as an opportunity to charge not only a high rate, but an unfair one. This is particularly a problem at “buy here, pay here” car dealerships. These can be as high as 30 percent, though you’ll more commonly see them in the twenties. If you struggle to make payments consistently, you will also find yourself with negative equity in no time, given that your car will lose value as your loan increases.
Be sure to shop around for loans before going to the dealership. You’ll almost always get a better deal from a third-party.
Not giving you loans for cars in your price range
This one is frustrating, and really it’s a systemic issue with car lending. Lenders, even the traditional big banks, don’t typically finance car loans for under $5,000, and some won’t even go that low. This is a problem when you are trying to be frugal and/or protect fragile credit. You need a loan but also need to avoid an expensive ride.
Purchasing a used car in the $4,000 to $5,000 range can get you a great affordable vehicle, with lots of life left, but that’s of no use if you can’t get the financing and don’t have the cash available. You may not like the idea of being forced over your budget by an additional couple grand.
One good tactic here is to inquire with credit unions, who may offer a loan product more in line with what you need. Make sure you look at the terms carefully, though, as a lower interest rate will typically come with a higher monthly payment, due to having a shorter repayment term.
Remotely disabling your car
If you miss enough car payments, your vehicle can be repossessed. Technology has changed the repossession process significantly, and some lenders will install devices that allow them to remotely disable your car if you haven’t paid. You’ll typically get warnings in the form of persistent beeping (like an alarm) when your payment is overdue, but then it’s just a matter of time before you’ll lose the ability to start the car.
Of course, you are responsible for your payments, but this practice raises numerous consumer concerns. For example, what if your car is shut down while you’re on the way to the hospital for an urgent medical need. Or, what if you are in one-hour parking when your car is disabled, causing you to get ticketed or towed?
The same technology that allows lenders to disable your car can allow them to track you. Again, it’s important to remember that you have a responsibility to your debt, and the installation of any tracking device/remote disabler would have been in the original contract you signed, but this still raises consumer issues. Does a lender really need to know where you are at all times? Are they protecting this information properly?
As you can see, there are many considerations when you purchase a car with subprime credit. You need to find the best price and financing, read through your contract carefully, and be prepared for any situations that arise and make your payment more difficult. Here is a summary of our advice, which you should put to use next time you purchase a vehicle:
- Carefully research financing options with multiple lenders, including credit unions, before you go to any car lot.
- Research the make and model of any car you are considering, and be sure to check its blue book value.
- As an extra precaution, ask to take the car for a few hours to a mechanic you trust who can give it a quick overview to make sure there are no glaring issues or impending repairs.
- Read any contract carefully and make sure you understand what happens when you miss a payment, and how any repossession will unfold. Be aware of any devices installed on your vehicle, and familiarize yourself with your state’s laws.
- If you fall behind, or think you will soon fall behind, call your lender immediately to discuss your hardship and arrange a plan.