We often hear or read about how to buy a car when you have credit problems. That can result in a loan with high—sometimes very high—interest rates, prepayment penalties and all kinds of unpleasant consequences in the event you can’t make your payments.
But since the financial meltdown of 2008, the game has changed with loans of all types, and that includes car loans. Today there are times…
…when you can’t get a car loan of any kind
If your credit is bad enough, it won’t be a matter of paying a high interest rate–you may not get a loan at all. A recent bankruptcy, foreclosure, or a credit score below 620 will just about sink your chance of getting a loan of any sort. And it should go without saying that you won’t get a loan if you’ve had issues with your current (or recent) car loan. A repossession or a string of late payments will leave lenders unwilling to take another chance on you.
Much of the third party “sub-prime” lending sector have left the business, which will leave you only with semi-unscrupulous dealer/lender loans that will lock you into paying two to three times what the car is really worth.
What choices do you have if you don’t want to go that route?
Buy a “beater” and pay cash
If you need a car and the lending window is closed to you, your only choice is to be a cash buyer. That means you’ll only be able to buy a car that you can absolutely afford based on the money you have available at the time of purchase.
Obviously, the more savings you have the better the car will be, but if you only have $1,000 or $2,000 you’ll be limited to buying a “beater”—a car that’s near the end of it’s useful life, probably has issues and won’t look too pretty.
If this is the route you have to take, embrace it! As bad as it seems at the time, you can turn it into a virtue—eventually.
Start saving your money
If you go the beater route, it can work for you but you have to make sure that it’s a temporary arrangement. The way to do that is by saving money while you own it.
Since you won’t have a monthly car payment, you should plan to save an amount each month that’s roughly equal to what a car payment would be if you had one. Let’s say that you assume a $300 per month payment; each month you put that in the bank as if you really do have a payment. If you do that faithfully each month, after a year you’ll have $3,600 saved. If you can resell your beater for $1,500—one good thing about beaters is that they don’t drop in value much—you’ll have over $5,000 to buy the next car with.
Car repairs will be an issue. This will work better if either you do many of the repairs yourself, or if you have a backyard mechanic who can do them on the cheap and you buy the parts yourself.
Trade up every six to twelve months
Let’s take this a step farther. One year after you buy your beater for $2,000 you’ve traded up to a $5,000 car. Once you do that, you continue with your saving strategy. Maybe you bump your “payment” up to $330 (10%), enabling you to save about $4,000 in the next 12 months. That plus the trade in on your second car—say $4,000—will enable you to buy a $8,000 car.
Let’s go even farther. Again, you continue your saving strategy in lieu of the car loan that doesn’t exist. Let’s say you bump the “payment” up to $375; one year after buying the second car, you’ve saved $4,500. You sell car #2 for $7,000, and those proceeds, along with your $4,500 in savings, enable you to buy a car for $11,500.
Now you’re starting to enter the realm of reliable transportation.
Keep trading up until you have the car you want
You can use this strategy to trade up as many times as it takes for you to get the car of your dreams. It’s not inconceivable that after five years—trading up each year—that you could buy a brand new car for $25,000 for cash!
Along the way, each year you’d be trading up on your car. As you do, you’ll be buying better cars that will need less in the way of repairs, and that will free up even more money to save for the next purchase.
Bonus: You won’t have a car loan!
Not only will you have the benefit of having a better car every year, but you’ll do so without having a payment. That means that not all of the benefit of using this trade up strategy happens in the last year or two. You’ll be debt free on your car throughout the trade up process, and that’s an excellent position to be in on any car.
By the end, you’ll have the car you want and you won’t need a loan. That’s the place we all want to be in!
And at that point, don’t be surprised if the dealer is begging you to take a loan on the new car. Dealers—and their lenders—love to make loans to people who don’t need them. When they ask you to take a loan, have a little fun…tell them that they don’t qualify for your loan business!
Have you ever been unable to get a car loan? How did you handle the situation?