Buying a car - advice needed

Question

Some bad decisions and/or stupidity during grad school left me with a credit score of 593 and a collection+late payment on my credit report. A month ago my car died and now I need to get another one (I've been commuting with a friend but he's leaving the firm). I looked around for financing options but obviously I've been declined at almost every possible avenue (I don't have a co-signer). However, a Toyota dealership contacted me offering me a loan - it's a bit far off so I haven't been able to visit them to discuss the details as yet.

So my questions are:

• Does it make sense to go with this dealer's financing? If anything, making payments on time would build up my score. The downside however, is that the cars cost on average 3-4k more than the proper price (for example a used car that costs 15k at the dealership will cost 19k if going through him).

• Does it make more sense to fix up my car (my mechanic estimates fixing it will cost more than the car itself), diligently handle finances and maybe try again in a year or so?

---edit---

I make around 70k a year pre-tax, my rent is 800/month, I have a credit card with a 500$ limit, so I CAN afford to make car payments on time - the only problem is getting to a point where I can score a good deal on financing. My point is, given this situation where I can afford payments and the dealer is a reputed one, does it make sense to go for this offer? Thanks again

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Thanks much, Craig

Answer 1

I would actually disagree with MrChrister on this.

1. You can afford yourself the car in this price range paid cash. I don't know how exactly you spend your income, but from my experience, in expensive California, saving $20K a year from $70K income with $800/mo rent is feasible.

2. Having a loan on your credit report which is paid on time and in full will definitely help you rebuilding your credit.

3. Your calculations re the costs of the loan are based on the assumption that you're going to keep the loan for the whole period. Don't do that. See #1 - you can repay this loan much quicker than the 3 years it should originally have been. 6 months of the loan which is then paid off will do marvels to your credit report and credit score.

Yes, it is going to cost you some, but in your particular case I would argue that its worth it. You're an adult now, you need credit cards, you'll need a mortgage at some point, you need to rent a place to live - all these require a good credit report. Just waiting, as MrChrister suggests, will help, but much much slower.

Having said that, a seller that "cannot discuss the terms over the phone" is most likely a dishonest person. Once you're there and in front of him it is harder for you to verify information, resist signing papers, and negotiating.

Answer 2

If it costs more to fix the car than the car is worth, then those repairs are not worth it. Hit craigslist and look for another junker that runs, but is in your cash price range. Pay to get it looked at by a mechanic as a condition of sale. Use consumer reports to try and find a good model.

Somebody in your position does not need a $15K car. You need a series of $2K or $4K cars that you will replace more often, but pay cash for. Car buying, especially from a dealer financed, place isn't how I would recommend building your credit back up.

EDIT in response to your updates: Build your credit the smart way, by not paying interest charges. Use your lower limit card, and annually apply for more credit, which you use and pay off each and every month. Borrowing is not going to help you. Just because you can afford to make payments, doesn't automatically make payments a wise decision. You have to examine the value of the loan, not what the payments are. Shop for a good price, shop for a good rate, then purchase. The amount you can pay every month should only be a factor than can kill the deal, not allow it.

Pay cash for your vehicle until you can qualify for a low cost loan from a credit union or a bank. It is a waste of money and time to pay a penalty interest rate because you want to build your credit. Time is what will heal your credit score.

If you really must borrow for the purchase, you must secure a loan prior to shopping for a car. Visit a few credit unions and get pre-qualified. Once you have a pre-approved loan in place, you can let the deal try and beat your loan for a better deal. Don't make the mistake of letting the dealer do all the financing first.