If you’re in the market for a car and your credit history is shaky or worse, you’ll see plenty of dealerships with signs proclaiming “no credit, no problem,” “buy here, pay here,” “no credit check,” or “we welcome bad credit.”
It’s no secret that traditional lenders like banks, credit unions and the financing arms of car dealerships charge higher interest rates to low-credit borrowers. But if your credit is bad enough, they probably won’t work with you at all.
That makes bad credit/no credit dealerships all the more enticing to buyers with lousy scores. Are they legitimate, though, and do they offer good deals? Or are there better alternatives? Here’s what you need to know.
It Should Be a Last Resort
According to the Consumer Financial Protection Bureau (CFPB), lenders like banks and credit unions limit the amount of money they’ll lend based on the value of the vehicle the borrower is purchasing.
But those limits don’t apply to dealers that act as their own banks.
Buy here, pay here dealers can loan money based on an inflated price that’s higher — much higher, in some cases — than the car’s actual value. That means buyers often wind up borrowing thousands more than the car is worth, and they can also expect to get hammered with financing charges.
According to the Experian State of the Automotive Finance Market Report: Q2 2022, the following are the average used car loan interest rates by credit score:
- 781 to 850: 3.71%
- 661 to 780: 5.58%
- 601 to 660: 10.48%
- 501 to 600: 17.29%
- 300 to 500: 20.99%
As you can see, subprime borrowers can expect to pay higher APRs than most credit cards charge — and non-franchise dealers can charge even more.
It’s Par for the Course When Your Credit Is Bad
It might seem unscrupulous to squeeze the people who need the most help, but the fact is, bad credit makes life more expensive.
“The unfortunate truth is, when you have bad or no credit, you’re going to have a harder time than others when trying to purchase a car through a dealership,” said Geoff Cudd, consumer advocate and owner of FindTheBestCarPrice.com. “No-credit dealerships are one of the limited options that folks with bad credit have when searching for a new car, but they are often predatory and take advantage of the fact that these people have fewer options by charging more, requiring larger down payments, or hiking up interest rates for financing options.”
You’ll also probably have fewer inventory options, and CFPB advises that some bad credit/no credit dealers install devices that disable the vehicles they sell to make repossession easier if you miss a payment.
The Benefits: You’ll Get a Car and a Chance To Rebuild Your Credit
Dealerships for people with bad credit do have a few things going for them. The most obvious is also the most important — they’ll work with you when no one else will.
“Bad credit/no credit car dealerships are typically more lenient when it comes to credit scores,” said Joe Giranda, director of sales and marketing at CFR Classic. “If you have a lower credit score, you may still be able to finance a vehicle through one of these dealerships.”
Another benefit is that by securing financing — even if it’s on bad terms — you can repair your credit by making on-time payments. Then, once your credit improves to a prime level or something close to it, you can refinance with a traditional lender at a lower rate.
Consider Your Options
Several experts suggested saving up for a private sale instead or seeking out a co-signer to help you secure traditional financing. You might also try to borrow through a lender specializing in low-credit auto financing.
According to MarketWatch, the following are the best bad-credit auto lenders, which have varying requirements for minimum income and credit scores, and some have no minimum credit score requirements at all:
- Ally Clearlane
- Auto Approve
- Prestige Financial
- Capital One
Also, Carvana offers financing without a credit check to most people who earn at least $4,000 a year and CarMax has options to “accommodate most credit profiles.”
If you do choose to go with a bad-credit dealer, make sure to ask around, shop around and remember that as the party who’s forking over thousands of dollars, you still have leverage.
“The best way for people with low credit scores to buy from a no-credit dealership is to do their research,” said Cudd. “Make sure you find a reputable dealer and don’t accept the first deal offered just because you think you won’t get a better one due to bad credit. Trust your gut. If you feel like you’re getting a raw deal, you probably are.”
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