Questions To Ask When Buying A Car For The First-Time Is it Better to Buy or Lease a Car After Bankruptcy?

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Is it Better to Buy or Lease a Car After Bankruptcy?

If you want to get approved on the best possible terms to buy a car, it’s important that you know the lender’s credit guidelines before you apply for credit… especially if you’re bankrupt you

This will save you time and frustration–but more importantly, it will help you avoid credit inquiries that can lower your FICO credit scores by up to 12 points per inquiry.

Step 1 in making the decision to lease or buy is to determine the lender’s lending guidelines.

You start by asking if they lend to people with bankruptcy. If so, on what terms?

That’s right. You must first file for bankruptcy. Don’t hide it. We have to face the fact that some dealers will not work with people who have filed for bankruptcy. So our job is to find those who do.

Some lenders will only rent to people with bankruptcy. Some will only offer purchase financing. However some will only lend using a hybrid of the two – this is especially common in Texas.

Ask the dealership’s finance director to tell you what structure the manufacturer prefers.

And here’s a quick tip for you: if your bankruptcy doesn’t show up on the credit report pulled by your lender – then, in the lender’s eyes, you’re not bankrupt.

The only lenders I would consider using are:

– First choice: Captive lenders (car manufacturers)

– Second choice: Banks (not financial companies)

– Third choice: Credit unions

Ninety-nine percent of the cars I’ve leased over the years have been with captive lenders. Only one is rented by a bank.

That particular deal came from a conversation I had with Amy, the finance manager at the local Land Rover dealership here in Indianapolis. I told him I was open to his financing recommendations, but I preferred financing through the car manufacturer.

I told him my current FICO scores. He immediately said that with my scores he could do better through the local bank. I signed a credit application and told him to go for it.

The next day I signed a lease contract with that local bank. Being open to his advice literally saved me hundreds of dollars a month on that car.

So be flexible…but be careful. It seems that most car dealers call all their funding sources banks. When in fact some are banks, some are credit unions, and most are sub-prime finance companies.

Here is a list of some of the most commonly used sub-prime car finance companies:

1. HSBC Automotive

2. Capital One

3. AmeriCredit

4. WFS Financial

You’ll want to pass on sub-prime finance companies–unless you’ve exhausted all other options. Sub-prime lenders should be your last resort.

And only use credit unions if they report to all three national credit reporting agencies. How can you tell if a credit union reports to all three credit reporting agencies?

Simple–you ask. Ask the branch manager of the credit union if they report. And after you get the loan, check all three of your credit reports and make sure the trade line appears on each one.

The three worst captive lenders to lease or buy from after bankruptcy are:

1. BMW

2. Mercedes

3. Porsche

The three worst primary mortgage lenders are:

1. Honda

2. Kia/Subaru

3. Toyota

What makes it worst?

Once these lenders see that you have filed for bankruptcy, they will be less likely to work with you. However, if they are willing to work with you, they want to be at least a few years from discharge and have full credit during that time.

Now that I’ve told you how bad the six lenders are–there are times when they can give you great deals. For example, if one of the above happens to be the largest retailer in your area, they may be able to offer you special deals that a small merchant might not.

Of course, things change all the time with captive car lenders. They change their credit guidelines on a whim to meet their own financial goals. So, it’s always a good idea to at least research these dealerships–just don’t get your hopes up.

OK, so you’ve done your research and narrowed down your choices to one or two car manufacturers.

Step 2 in making a lease or buy decision is to check your FICO credit scores.

It’s important to have the most up-to-date scores when you talk to car dealers (like I did with Amy). This puts you in charge.

When you walk into a dealership with your FICO scores, the dealer will know that you are a more informed consumer and will not be taken advantage of. Just be aware that the FICO credit scores used by car dealers are slightly different than what we consumers see. The scores reviewed by dealers are called FICO Auto Industry Option Scores. The good news…these FICO scores can be higher than your normal FICO scores if you have paid off all past auto loans as agreed.

Some car dealers have told me that if your FICO scores are higher than the scores the dealers check–they may even use your scores to get a better deal.

You can purchase your scores from myFICO.com.

Step 3 is to interview the remaining car dealers at a deeper level.

Start by asking them these questions:

– Which credit reporting agency do you use to make a lending decision?

– What is your minimum credit score requirement to be approved?

– What credit score is needed to get the best interest rate?

– Do your lenders prefer to offer lease or purchase financing to a bankrupt borrower?

– What incentives are there to rent or buy now?

At this point it is important to remain open to renting or buying. Weigh your options and incentives. Remember, you are buying the financing. In other words, the most important factor is the lender’s willingness to lend you money.

I personally look at the lease versus buy decision in three ways:

1. If you have just recovered from bankruptcy, what matters is whether you can be approved for an interest rate you can afford through a lender that reports to all three national credit reporting agencies. That’s why you should consider bankruptcy-friendly lenders.

2. When your credit scores start to improve, you can start choosing cars based on which credit reporting agency the lender uses to determine if you qualify. Obviously, you should choose the lender that uses your highest FICO credit score to make a lending decision.

3. When your scores are high enough … or two years have passed after your bankruptcy … or your bankruptcy does not appear on the credit report used by the lender, then you can choose almost any car you want. But make sure you still do your research and use your credit scores to help you compare interest rates, terms and incentives.

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