Anytime an offer seems to be too good to be true, it probably is.
Such is the case, with “guaranteed auto credit”. This is a marketing term most commonly used by dealerships that finance their own cars without the use of a third party lender or bank. Most dealerships that function in this manner refer to themselves as Buy Here, Pay Here Car Lots.
While there may be a time of desperation in your life that you find no other option but to use this type of financing, it should be avoided if at all possible. Dealers that offer in house financing, offer a very expensive way to buy a car with bad credit. There are better options that you can take advantage of, but for the purpose of this article I’ll explain the in’s and out’s of buy here pay here financing.
You will most always pay more for a car at a buy here pay here dealer, than you will through a normal car lot or through a private party purchase. These types of car lots do not have a loan company that regulates the amount of money that can be financed for a vehicle. The commonly used valuation guides such as Kelley Blue Book and NADA are not used and the dealer can charge as much for the vehicle as they wish. It is common that vehicles at these types of car lots are priced thousands of dollars over their retail value. This puts customers out on the road owing more on a vehicle than it is worth and makes it very difficult for the customer to be able to trade their vehicle until it is nearly paid off.
When you purchase a vehicle with the aide of normal financing channels, such as indirect dealer lenders, banks or credit unions, the lender determines the true loan value of the vehicle. The loan is backed by collateral and the value of that collateral in proportion to the amount financed needs to be in line for them to have some sort of security in the loan, should recourse be needed if the loan goes into default. This prevents you from being upside down in your vehicle with negative equity, to a certain extent. It’s always better to apply with a real lender whenever possible, before resorting to this form of in house financing.
Once again, there is not a real lender providing guidelines for your interest rates. Therefore, the dealer charges as much interest as they can get you to agree to, within state law. You can expect to pay as much as 29% interest at one of these dealers that offers guaranteed auto credit. That’s more than the finance rates charged by many major credit card companies and is considered by many to be predatory lending.
If you’re late on your payments, many of these guaranteed auto credit dealers that finance their own cars will not work with you as normal finance companies will. Repossession rates for buy here, pay here lots are very high. Some say that the reason that these types of dealers are more quick to repossess a car is because they make money by reselling a car multiple times, collecting multiple down payments.
It’s nearly impossible to get a no money down deal at a car lot that offers in house finance. The main reason is that the guaranteed credit is based upon your having a sizable down payment. In some instances, the amount that you pay down is equivalent to the amount that the dealer paid for the vehicle, and the amount financed is pure profit.
While the idea of guaranteed auto credit is appealing, it’s simply not a good deal if you’re interested buying a car with bad credit. There are much better ways to get a car loan and there are bad credit car loan companies that are willing to help you to get a vehicle, without the predatory finance charges and sales tactics employed by dealers that finance their own vehicles.
Do your homework, apply with some good lenders that specialize in helping people that have credit problems, and you’ll drive away with a much better deal. As the old saying goes, “A penny saved is a penny earned”.