What does bad credit mean and what are the implications down the road is a we have discussed with a lot of our customers. When you shop for a new vehicle, you probably pick a few models based on your lifestyle, brand reputation, and affordability. That strategy usually works – especially with so much information online to help narrow down your decision. Except when it doesn’t work because you have bad credit.
Bad credit at the car dealership
When you have bad credit, there are additional factors to be considered in your next car purchase so you can avoid the following, real-life, real frustrating scenario:
Emma’s dealership experience had gone well until it came to the part when they negotiated the numbers. To her surprise, they had agreed to her selling price, but the payments were coming out different than what she obtained using an online auto payment calculator.
‘What do you mean my monthly payment is $428? I figured it out online. I’m going to put down $2,000 and pay my taxes and fees, so I’ll be borrowing $18,000 for 60 months. I know my credit isn’t the best, so I figured 7% for the interest rate and it came out to $356/month‘, she said.
The salesperson explained, ‘the dealership doesn’t determine the interest rate. The lender does that. Based on your credit score you’re going to be at a higher rate. He calculated these payments at 15%. We don’t know for sure though, until we submit your application.‘
‘So you’re saying that my payment is‘, she pulled out her phone, ‘$72 more a month because of my credit being bad.‘
‘Unfortunately. The 7% rate you used would be for a medium credit borrower.‘
Emma ran through her budget in her mind. She hadn’t wanted to go far over $350 per month, but this was exactly the vehicle she wanted. She’d done so much research. It was in perfect condition. She was willing to make the sacrifice. ‘All right. Let’s do this.‘
Further implications of what bad credit means
A couple days later, the dealership called her back, ‘Great news, when can you come in?’
Emma had assumed “great news” meant the loan had gone through. When Emma arrived at the dealership, she experienced a big surprise. The finance manager asked her for an additional $2,795, she was furious. He explained without the additional down payment the Wrangler wouldn’t work for her situation.
‘What do you mean the Wrangler doesn’t work for my situation?’
‘Ok’ the finance manager took a deep breath, as if he’d given this speech a few thousand times. ‘What consumers don’t realize is that when they pick out a vehicle, and they a have derogatory credit history, the lender wants to be in a good position with the collateral, the vehicle that is. In case, and I’m not saying this would happen to you, but in the the event the vehicle gets repossessed, they’re going to send it through an auction. They want to make sure the vehicle is worth more than what you owe. Otherwise, they are going to be out the difference. So, they look at the book value vs. how much they are willing to lend. They consider how much you’re putting down, how fast it’s going to depreciate, lots of factors.‘
‘I get that,’ Emma said.
‘Great. The other issue is the only banks that will lend money to someone with your credit profile charge what’s called an acquisition fee. They see you had a repossession less than two years ago and that really worries them. So they charge not only the maximum interest rate to you, they also charge us, the dealership, what’s called an acquisition fee. What that means is they charge us, the dealer, to do the loan. We don’t have the profit in the deal to absorb that cost, so it gets passed onto you.’
‘The lowest acquisition fee I could find for you was $795. Let’s have look at the numbers,’ he pulled out a blank piece of paper. ‘You want to buy this Jeep Wrangler for $20,000. And the book value is $20,000. Wranglers, particularly this model, are popular, so they don’t go for much behind book value. Sometimes they go over book value, so it’s not that you did a bad job negotiating and didn’t get a good deal. But the bank is only willing to lend 80% of the book value given your credit profile. You’re putting down $2,000 which only gets us to 90% of book value. But the bank is also charging us another $795 – so in order to make this work, you’ll need to put down $4,795.’
‘If I had it, I would do it …‘ Emma felt devastated.
‘I know, and that’s why I want to help you. I can get you into a vehicle, one that I can sell you behind book value that’ll work with your $2,000 down for the bank.‘
More than not being able to get her dream car, Emma started to think about all the ways having bad credit had been holding her back. She wanted to apply for a job at the bank, but it said it required a credit check. She wanted to move to a new apartment closer to her family, but the application said it required a credit check.
Emma felt fed up with how much a couple of bad decisions in the past are now limiting her life choices. ‘I was young and didn’t know better …’ she was thiking to herself. Therefore, read our next article to figure out what she did to quickly move from bad to medium credit.