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Are you in the market for a used car and have a less-than-perfect credit record?
You're not alone.
According to a new study by the
Power Information Network, more than one-third
of used car buyers who financed or leased their
vehicles had what the industry calls "subprime"
credit scores.
That means their credit score -- an amalgam
of information about your past credit history, income and other finance activity
-- was below 650. Credit scores range from 300 to 850 and the median score among
all consumers is 723. A low credit score doesn't mean you won't
get a car loan -- last year more than 2.9 million cars were sold to people with
subprime credit scores. But it does mean you'll pay more in interest, often with
rates above 10 percent.
To raise your credit score, it's
crucial to pay on time; reduce -- but not eliminate
-- the number of active credit lines you have.
It is also important to not have a lot of credit
inquiries over a short period of time.
The Power study also painted this
picture of an average used car sale to a subprime
borrower.
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Subprime car financing
facts: |
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| • | Down
payments were smaller than those put forth by prime credit borrowers. They averaged
about $1,900, which was 39 percent lower than for prime credit customers. |
| • | The
length of the average loan was only slightly longer for subprime borrowers --
63 months compared to 62 months for prime customers. | | • |
Subprime
customers tended to buy midsized cars,
followed by compact cars and minivans.
Not surprisingly, luxury cars were at
the bottom on the shopping list. |
| • | The
used vehicles that subprime borrowers bought were at least six years old. |
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That last point is particularly troubling
when combined with the length of the loans. It means that the average subprime
buyer, assuming they keep the car until the loan is paid off, will be making payments
on an 11-year-old car. Reliability studies suggest that the
average car begins to encounter ever more expensive maintenance costs after six
years or 100,000 miles, meaning that subprime buyers could be hit with a double
whammy of having to make payments on a car that's also running up significant
repair bills. If you find yourself in the market for a car
and you have less than prime credit, here are some options you should consider:
- Check your credit report for areas where you can clean things
up by closing unused department store accounts or paying down the balance on revolving
credit accounts so you are not always up against your limit.
- Find
a way to put more money down, and don't roll over an unpaid balance on a car you
may be trading into the one you're buying. If you do, you will automatically owe
more on the new vehicle and be upside-down -- owe more than the car is worth --
for a longer period of time.
- Shorten the length of the loan
to no more than 48 months, with 36 months being an ideal goal. That way, you will
own the car sooner and are less likely to be burdened with both car payments and
maintenance bills.
- Consider sticking with what you have now.
Even if you have to make $1,000 in repairs to the car you own to make it more
reliable, that's a better course of action than being saddled with a long-term
loan on a vehicle that, perhaps in three years or less, could leave you facing
the same dilemma.
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