Cars can be a stressful purchase. Reliable cars don’t come cheap, they’re necessary for daily life in much of the United States, and you don’t always get to decide when it’s time to buy. As nice as it would be to buy a car with an intentional timeline and well-planned strategy, sometimes that’s just not possible. And if your car has bit the dust while you were in the midst of improving your credit, you might feel you have few options. Here’s something to consider if you’re in this situation and looking at working with a car dealership that doesn’t require a credit check.
What Are No-Credit-Check Car Dealerships?
There are a variety of car dealerships types, and different types offer different forms of financing. Some dealerships are franchised with car companies backed by their own financial arms (Toyota Financial Services, for example). Some send your car loan application to several lenders to see what approvals come back. Some even offer their own financing specifically for people with no credit or bad credit.
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A dealership that might be considered a “no-credit-check” car dealership is one that will do the latter. Here’s a helpful definition from the Consumer Financial Protection Bureau (CFPB):
“A ‘no-credit-check’ or ‘buy here, pay here’ auto loan is offered by dealerships that typically finance auto loans ‘in-house’ to borrowers with no credit or poor credit.”
These types of financing deals are meant for people who can’t pass a more rigorous credit check with a bank or lender, or at an auto dealer that sends out the application to other banks and lenders. It’s to help people who don’t have the best credit get access to a car when they need one. The thing is, lenders working with people who have poor credit or no credit will often try to protect themselves from the risk of default by charging higher interest rates.
What’s more, the CFPB also warns that some “buy here, pay here” dealerships” put tracking devices in the cars they sell. The purpose? To “repossess or disable the vehicle if you miss a payment.”
In short, there are some risks to be aware of before deciding to finance through a no-credit-check car dealership.
The Potential Problem With No-Credit-Check Car Dealerships
According to the CFPB, when these types of dealerships lend money for cars, they don’t have to be limited to the value of the car the way a typical bank would be. As such, consumers could end up paying more than a car is worth if they finance through a no-credit-check car dealership. The CFPB explains:
“Normally, a bank, credit union, or other lender will limit the amount it will lend for the purchase of a vehicle based on the vehicle’s value. Those lenders will not loan more than the value because the vehicle in question simply isn’t worth it. But when a dealer acts as its own ‘bank,’ it may not set such limits.”
How much more might you pay without these limits? There’s no way to tell until you crunch the numbers on a particular car loan, but the CFPB says it could be to the tune of “thousands of dollars more than the actual value.” They conclude that, “with ‘buy here, pay here,’ there is a bigger risk that you will borrow to pay more than the vehicle is worth.”
With all that said, you might be reading this and feeling that you have no other choice. Since a car is often the only way to get to and from work (especially in rural areas that might not have convenient public transportation options), then overpaying on value to get into a working vehicle might feel like a necessary evil. But there could be other alternatives.
Alternatives to No-Credit-Check Car Dealerships
Rather than letting “buy here, pay here” car dealerships be the first choice, Senior Consumer Advice Editor at Edmunds Ronald Montoya suggests looking at better-established car dealerships who offer to help people with bad credit. He also suggests working on getting pre-approved for a loan.
You could seek out loan pre-approvals before you even choose a dealership by going to a local bank or credit union if you wanted to. Montoya warns, however, that you might still have to deal with higher interest rates on a loan and end up in an older car due to the fact that your credit isn’t in perfect condition.
Another alternative Montoya suggests is to explore the possibility of saving up for a used car that you can buy “outright.” The thought here would be foregoing the financing process — and the interest payments it comes with — altogether.
This is a tough option to consider unless you have another way to get around while you work to save the money, plus the car you buy will likely be much older. Montoya says, “I’d only recommend going this route if you are comfortable making a few repairs yourself, or you have a trusted mechanic to handle any repairs and maintenance that might be needed.”
Improving Your Credit While You Work to Get Into a New Car
If you have the ability to wait until you can buy the car outright, you can also work on improving your credit at the same time. You might even find that you improved your credit enough in the time it takes to save for the car that you can use the savings as a down payment on a more reliable car instead. After all, improved credit scores could mean achieving better loan rates and options.
It might seem like this is the worst time to think about improving your credit, but many of the steps necessary to improve credit can be taken in everyday life. For example, both FICO® and VantageScore® rank payment history at the top of the credit score calculation. Therefore, you can start to improve your credit right away by never making a late payment on a bill.
Next, if it’s more realistic to pay your current debt down than it is to save to buy a car outright, that can also help you. Amounts owed, especially on revolving credit like credit cards, is another influential factor in your credit scores. Thus, reducing those amounts can greatly improve your scores.
In the end, if you take steps to build good credit while you’re working on other financial goals such as buying a car, you can set yourself up to be in a position later that offers you more options than what you might have today. Even if that means you have to go to a no-credit-check car dealership today, you can work to ensure that you won’t need to do it again in the future.