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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

---.---

Thanks much, Craig

  • 2
    Do you mean all payments add to $19K or that he is charging you $19K for a $15K car and then adding interest? How much interest? – JoeTaxpayer Feb 7 '12 at 16:26
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    @Craig - don't bother going to meet him. "Can't discuss it over the phone" is bunk. He is trying to get you in to make an emotional decision. If you go, he will put a hard sell on you. – MrChrister Feb 7 '12 at 17:11
  • 2
    Agree with mr Christer. I'd avoid this guy. – JoeTaxpayer Feb 7 '12 at 19:08
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    "can't disclose terms of the loan over the phone". Go no further. – gef05 Feb 7 '12 at 20:43
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    This sounds like a situation where you have to bite the bullet and just accept a crappy interest rate due to previous indiscretions. However since you are a responsible adult now, this will be the only time you will have to suffer this consequence! Also, do not go with dealer financing. Their rates are usually worse than what you can find at credit unions in your area. Shop around and get pre-approved and you may surprise yourself. – CheckRaise Feb 7 '12 at 21:02
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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.

  • +1 - Nothing wrong with this answer. I am looking at the first sentence in my advice. I personally worry that the OP might consider new habits based on past performance. However, he is an adult is something I should pay more attention to. – MrChrister Feb 7 '12 at 18:43
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    I accepted this because it's what I ended up doing. I got in touch with a Honda dealer who set me up with a 6% APR for 5 years and I end up paying 320$ for a 2009 accord. 6% is higher than I'd like to pay, but I see it as a penalty I have to bear for my irresponsibility in the past. Lesson learned: NEVER pay off tuition bills via credit cards :) – Craig Feb 13 '12 at 18:09
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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.

  • 3
    I have to agree with you completely. For the OP to be considering spending $4,000 just because the guy who will sell him the car but "can't discuss it over the phone" will take his not-so-great credit--and that carrying that debt will help his credit rating--strikes me as a truly terrible deal. Better, yes, he save $2-$5k cash, buy a good solid used car, and start using a credit card responsibly for a year or so. He'll be in a stronger position ultimately, and have $14-$17k go right into savings or investments. – Chelonian Feb 7 '12 at 19:21
  • Here is an article on tips for buying used cars outside of dealerships: blog.carsabi.com/2012/01/31/hacking-the-used-car-purchase – Steven Feb 7 '12 at 21:12
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Credit Score

If you have defaulted on something, then the best way to restore your credit is to pay whoever it was back and then get the information corrected on your credit report. It also wouldn't hurt to get a copy of the report and make sure everything is correct. You can get your credit reports for free either annually at: http://www.annualcreditreport.com/ or whenever you are declined credit.

Auto Lending

John Oliver has a piece on auto-lending where unscrupulous creditors sell junk cars to people who can't make payments (or won't make payments because it broke down) then repossess them, only to repeat the process with the same junk car to another buyer. https://www.youtube.com/watch?v=4U2eDJnwz_s - be aware!

Dealer vs Private

If you know about cars (or have a friend who does and could come with you) you could start with something you can afford by looking in classified ads or auto trader. A car that has done 80,000 miles will be quite inexpensive but you run the risk that there could be expensive repairs that outweigh the value of the car, and that repairs could be required for the car to pass inspection.

You would save a lot of money that way, and your bank might be able to provide you with a loan. If you have a checking account with them and your salary is coming in, they may be more willing to lend than based on your credit report alone.

In my experience dealers, even supposedly reputable ones are terrible. The only benefit I have seen is that they sometimes offer certified-pre-owned vehicles which they guarantee will continue to run for the next few years or thousand miles. However you may find that these cars still have issues, just that when you bring them into the shop the warranty covers the repairs.

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