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Why is Buy Here Pay Here Financing the Wrong Way to Buy a Vehicle?

Anyone looking into how to buy a car with bad credit will already be familiar with ‘buy here pay here car lots’. This is a financing arrangement where the car dealer supplies a loan package as well as the purchased vehicle. These car dealers (surprise, surprise) are in the business of making money, and are not especially interested in helping you resolve your credit problems. In almost every situation, these loans end up being more expensive than the alternatives, and they don’t do a thing for your credit score. While going with an independent lender may require a bit more research on your part, it will likely save you money while helping you to position yourself for a brighter economic future. There are many other good reasons to seek out alternatives before going straight to the dealer. In this article we will demystify the car financing process and point out several practical alternatives. If you are in the market for a car and you have less than perfect credit, it will be worth your time to read on. The Disadvantages of In House Dealer Financing Whenever you arrange your financing through a dealer, the loan is basically another product that the dealer is selling you. He gets a loan from the bank with a certain interest rate, and then sells you that same loan at a higher rate. The difference is his profit margin. Therefore, if you can arrange your own loan ahead of time, that’s one less mark-up that you have to pay. The only advantage of getting a loan at the dealer is convenience. That’s it. Yet for that convenience, you will undoubtedly pay dearly over the life of the loan. Beware of dealers who try to rush you through a sale in a single day. It is always better to take your time and explore the options. It might not be the most fun you’ve ever had, but you will thank yourself down the line. Even if a dealer is willing to reduce the sticker price if you finance in house, it is only because he knows he will make his profit back on the ‘back-end’ of the sale, as you struggle with your monthly payments. Another big disadvantage of the in house financing system is that is doesn’t appear in credit bureau reports. Remember: the only way to improve your credit is by consistently making payments over time. The implications of your credit score are far reaching and will come up again and again. From car and house loans to telephone lines, a good credit score makes your life easier. Like it or not, if you have bad credit, there is no other solution but to begin repairing your record step by step. The good news is that every monthly payment you make on time is an opportunity to take a step toward healthy credit. Therefore, every big purchase you make is an opportunity to move forward. Just by making your minimum car payments, you will be taking great strides toward greater financial freedom. In house creditors, however, take you out of that system. Even if you pay on-time every month, the credit agencies will never know about it. Your credit stays bad despite the fact that you are acting responsibly. This is a significant danger when you use in house financing. Not only are you probably paying more than you have to, but you are doing nothing to repair your bad credit. It is usually much wiser to get a better deal while working to improve your credit at the same time. This way you kill two birds with one stone. Before you visit the dealer, remind yourself of this important truth: you have options. There is absolutely no reason to accept the first financing offer that the dealer puts on the table. No matter how convincing he is or how few options you think you have, there is almost always a better way. If Buy Here Pay Here Loans Are So Bad, Why Do So Many People Use Them? Much like a new car, a buy here pay here loan is shiny and attractive. Most people with bad credit are already gun shy, having had at least one bad lending experience, maybe many more. Dealerships count on this reluctance to talk to the banks when they push their loan products. Borrowers with rocky histories love it when the dealer says: ‘no credit history required.’ At most car lots, the buyer only needs to prove income and provide a downpayment. The buyer doesn’t need to drive across town or pick up the phone, just sign on the dotted line and it’s taken care of. Dealers count on your eagerness to get your new car off the lot quickly to sell you an expensive loan. Beware: the privilege of convenience is likely to cost you thousands of dollars. Online Bad Credit Lending Explained One popular alternative to dealership lending are online bad credit lenders. Most often, online brokers are specialists in matching up people with troubled financial histories with specialized lenders. These agencies have seen it all, and will be able to offer realistic advice for your situation. The key difference between these lenders and banks or credit unions is that they use a different set of criteria to evaluate your rate. Instead of looking primarily at your credit score, they will do their calculations based on your income and bank statements among other things. They may not look at your credit score at all. As with any loan, the more financial liquidity you can prove, the lower the rate you are likely to secure. Providing a large downpayment is perhaps the best way to knock points off of your rate, though a steady employment history is also very useful. In the current lending marketplace, there are lenders who specialize in working with all kinds of hard-cases. Whether you have no credit history because you are young or if your history is riddled with bankruptcy and bad checks, there is nothing they haven’t already seen. Of course, the cost of dealing with high risk lenders will be a higher rate equalling a more expensive loan over time. A good rate would be anywhere between 1-7%. A higher risk loan will come with a higher rate, anywhere from 15%-25% or more. The lowest rates will most likely be obtained directly from a bank or credit union, but that might not be possible with bad credit. One of the best alternatives is utilizing online bad credit lenders. Depending on your situation, paying a high rate may be an acceptable solution. If you use your car to go to work and make money, for example, then at least you are receiving a financial benefit from your loan purchase. As always, it is important to remember that your monthly payments are helping to proactively improve your credit. Take a deep breath and keep writing those checks. It won’t be long before you are able to refinance based on your new and improved credit score. Advantages of Using an Auto Finance Company or Online Lender As we have already discussed, using a traditional lender is an important step in repairing damaged credit. Another advantage to going the traditional route is that you can often secure a loan with no down payment. These are available for both new and used vehicles. A buy here pay here arrangement will almost always require a significant amount of money up front. A traditional lender will calculate your interest rate based on your credit score, it’s true. For many people, this is enough to send them running to the dealership. Always remember, however, that no questions asked loans will almost always end up costing you more. It is always advisable to do some research and find out what kind of loan agreement you can get. Lending is a competitive business, and it should be possible to find a good deal if you shop around. Good places to start are sites that help people with buying a car with bad credit, such as http://www.buyingcarswithbadcredit.com. Chances are the lending companies have seen worse situations than yours, so don’t be shy. The more informed you are, the better will be your negotiating position. Always remember that even if your rate is higher than you would like, using a traditional lender helps you improve your score a little bit each and every month. A few years down the line, if all goes well, you will be in a much better position to get a more attractive loan. Before You Do Anything Else, Calculate Your Spending Limit Grab a pencil and jot this down, because here comes the best advice you’ll get anywhere: probably the very best way to avoid finding yourself under water is to decide how much you can afford to pay right from the start. It’s a simple idea, but it is critical. Before you go to the dealer, before you open a car catalogue, before you start researching used car deals online, do a few simple scratch pad calculations. First, add up all of your monthly expenses and subtract this from your monthly earnings. About half of that figure is what you can probably comfortably pay each month for car payments. This is your golden number. The trick now is to find a car and a rate that lets you pay this amount or less every month. Before you have this number in your mind, it doesn’t even make sense to start looking for lenders. One really helpful step to take at this stage is to look for a loan calculator online. This free service is easy to find. Even before you have started looking for a lender or a car, you can start punching in numbers. There is no better way to get a good visual impression of the real costs of your upcoming purchase. All you have to type in is the loan amount, the length of the loan, and the interest rate. The calculator will instantly show you what your monthly payment will be. Even before you have any specifics in mind, you can start playing around to see what your payments will look like. Treat that golden number like law and don’t consider anything that is out of your financial reach. This is a great way to quickly discern what your real spending restrictions are, and what kind of loan you can realistically afford. Most loan calculation sites will also display an amortization table. This is a chart that shows you how much of your monthly payment pays off the capital and how much is dedicated to paying off the interest. The amount of interest versus capital is likely to be eye-brow raising for the first few months, but the good news is that the amount of interest paid goes down the longer you pay. Take a good long look at this chart before you take out a loan. Of course you know in the abstract that a good deal of money simply buys the loan, but this is a great way to make those numbers real. If you need a car, then you need a car, but it is important to understand the real value of your loan purchase. How to Choose an Online Lender Once you know your spending limit, you need to find a reliable lender. As with most things in life, personal experience is the most valuable currency. Talk with friends, family, and coworkers who have used online lenders in order to determine which companies are reputable. If you can’t find first hand accounts, look around online for reliable testimonials. The more you read, the better informed you will become. Compare rates. This is the nitty gritty when it comes to shopping around. Most online lenders have a quick and easy method for calculating rates. Although you will have to invest some time filling in your data at each site, it sure beats driving around town visiting different banks. Be patient and take careful notes. Soon a front runner should appear. Be sure to check the term for each loan. Some lenders will make your monthly payment go down by increasing the length of the loan, so make sure you are comparing apples to apples. As with all the other parts of the process, take your time and do your research. Don’t get sucked in by claims for rapid lending. These are usually designed to cause you to leap without looking. Always remember that proceeding with caution is likely to save you hundreds if not thousands of dollars over the long run. A Few Tricks For Improving Your Credit Score If you are already in a difficult credit situation, your car purchase can be a good way to help you get back on track. However bad the situation seems, there are always proactive steps you can take. Most people miss out simply because they are too frustrated or stressed out to take the time. Besides taking out a responsible loan, there are several other little things you an do to improve your credit score. Most of us like instant gratification, but credit scores don’t work like that. The only way to improve a bad credit rating is by acting responsibly over time. (Time will pass no matter what you do, so why not make a few changes in your own favor.) It is always extremely helpful to pay off small debts quickly. If you have many small outstanding debts, concentrate on paying them off one by one rather than spreading out your payments and making a tiny dent in each. Obviously it is important to always pay the minimum, no matter what. Every time you successfully pay off an account, it reflects positively in your overall score. Many people aren’t aware that applying for a loan and being rejected can hurt their score. If there’s a good chance you won’t get approved for a loan, better not to apply at all. Especially if you just want to find out your credit score, it is far better to inquire yourself online rather than letting a business do it. This is called a soft hit, rather than a hard hit. Soft hits have no effect on your score. Everyone is entitled to a free credit report once a year from the three credit bureaus: TransUnion, Experian, and Equifax. If possible, try to keep credit card debt below 50% of available credit. This is the key threshold amount that credit agencies use to calculate your score. Finally, be proactive. If you aren’t managing to pay your bills on-time, call your creditors to talk. They are often more willing than you might think to arrange new payment schedules. They hold your financial future in their hands, so try hard to maintain a good relationship by seeking reasonable solutions. Common Sense Tips to Consider Whatever Kind of Loan You Choose Regardless of where you eventually find your financing, there are a few common mistakes that are easy to avoid with a little forethought. The world’s highways are paved with tears from car buyers who are stretched too thin financially. Don’t be the next sucker wondering where they went wrong. - Be realistic about how much car you can afford. Buying too much car is a great way to quickly develop ‘negative equity’. In regular english this just means that after a year or three, your beautiful semi-new car is worth less than you still owe. If you need to trade in for any reason, you may find that you have to pay out of pocket just for the privilege of starting at zero again. Everyone knows that cars only go down in value over time. If you want to invest your money, search for something that gains value over time like a house or an education. - Attempt to pay off the loan quickly. Extended payment terms of 72 or 84 months will reduce your monthly payment amount, but not as much as you think. What it will do is lock you in to that car for 3-5 years. Do you know where you’ll be in 5 years? Do you know what your financial situation/family size/employment situation will be? It is usually best not to make long term financial commitments for a decidedly small monthly savings. In the end you pay the same (if not more). - Make the biggest down payment you can afford. Don’t risk breaking the bank, but it makes good financial sense to pay off as much of that car as possible right from the start. Not only will this reduce the interest you pay on the loan over time, but it will allow you the financial freedom to trade in the car or make other changes should they become necessary. Perhaps the best advice for buyers with bad credit seeking a car loan is to approach with patience and caution. There are literally thousands of options out there. Among them is the best deal for you. The more you shop around, crunch the numbers, talk to professionals, and gain experience, the more educated you will become on the subject. Within a week or two, you should be able to make a wise decision that will save you thousands on your loan payments; that is time well spent. Don’t get swept up by new car fever. Buy here pay here car lots sell loans the same way they sell cars: by relying on your hunger for instant gratification. Don’t be fooled by convenience; instead take the long view. It might be helpful to remind yourself that researching your options and taking it slow is work that pays, and a pretty good hourly wage at that. The more work you put in now works out to less work later at your job struggling to pay down your debts. It is best to take small patient steps toward your new car so as to avoid the bitter taste of regret. There is a loan agreement out there for you, and it is almost definitely not the one they are offering at the dealership. Make your calculations, research your options, talk to friends and relatives, and compare available rates. Don’t buy more car than you can afford, and don’t take on another loan that you won’t be able to pay off. Step by step is the only way forward, so be patient and take it slow. Good Luck!

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