Many young people attempting to establish themselves are frustrated when they attempt to purchase a car. They may have damaged credit — perhaps from high student loan balances — or "thin" credit files. Minor or major car infractions in the past also make it difficult to obtain car insurance — which most states require.
Fortunately, there are strategies to improve driving records and raise FICO scores to allow young adults (or anyone who needs to establish or re-establish credit) to purchase a good car at a reasonable price.
FICO Scores and Car-FICO Scores
Many people are surprised to learn that there is a FICO score specifically for automotive loans. Where conventional FICO scores range from 300 to 850, the FICO auto score ranges from 250 to 900. Automotive FICO scores determine whether a prospective borrower would default on an auto loan, according to Rod Griffin, Director of Consumer Education and Awareness at Experian.
“FICO automotive scores are an industry-specific variation of the generic FICO scores. They work in much the same way — they both use information from your credit report to do the calculation; the scores just weigh the information a bit differently, taking into account specific details that may indicate greater risk for an auto loan. The same categories of information from your credit report still apply, they just are weighted a bit differently,” Griffin explained.
The Potential Buy Here, Pay Here Trap
Along with purchasing a home, cars are the most expensive items most people will ever purchase. As of the end of 2018, the average price of a new car was $31,722. Interest rates for the typical 60-month (five-year) car loan were about 4.75%. Buyers with poor credit typically pay higher interest rates — if they can be approved at all.
So-called “buy here, pay here” dealerships present themselves as resources for people with bad credit to “get the car they deserve.” However, these dealerships carry a lot of baggage and should be avoided. Some of the most serious downsides are listed below.
Loans carry high interest rates and often include hidden fees.
Cars are usually older with more mileage and may be in poor repair.
Payments are usually required bi-weekly or even weekly.
Many dealerships require payments in person, not online or mailed.
GPS is almost always installed to track the car at all times to facilitate repossession.
Remote kill switches are often installed to disable the car if a payment is missed.
Drivers have walked out of work or after shopping or eating at a restaurant to find their cars missing because they have been repossessed. Or they may be stranded out on the road because a remote kill switch has been activated. Both instances are inconvenient and may even be life-threatening.
Pros and Cons of Buying Really Cheap Cars
One way to avoid being turned down for a car loan is to pay cash. However, for most buyers, paying cash means buying a really cheap car. Of course, paying cash means no risk of the car being repossessed. But really cheap cars often lack a lot of safety features that are standard on newer cars. They also typically have a lot of miles — 100,000+ miles is not uncommon.
In addition, except for people who are really handy with cars, paying less money upfront means more money spent down the line to keep the car running. Cheap cars often get poor gas mileage. That’s more money spent on gas. Drivers should also budget for regular trips to the mechanic for major and minor repairs.
Of course, it’s not smart to spend so much on a car that there is no money for anything else. A smarter strategy is to spend a bit more for used cars with good reliability records and fuel economy. Obtaining a car maintenance program also makes sense. Spending a few hundred dollars upfront can save thousands in expensive car repairs.
Smart Car Buying Strategies
Potential car buyers should clean up their credit records as much as possible before making a purchase. Pay off overdue bills, obtain credit reports and correct errors, and consider getting a second job, at least temporarily to increase income. You can even become an authorized user for someone with good credit — but don’t trash the other person’s credit by missing payments. All of these strategies can raise FICO scores considerable, and qualify buyers for better loan terms.
Technology can also give credit scores an instant boost, according to Griffin.
“New tools available to consumers, like Experian Boost, can increase your credit score instantly by adding additional positive payment history to your credit report. This also gives lenders a more complete picture of your financial history and ability to pay off debt by looking at your on-time utility and telecom payments. We see scores improve for two out of three consumers with an average increase of more than 10 points,” Griffin explained.
Improving a Driving Record to Qualify for Lower Insurance Rates
While many people may be unaware of automotive FICO scores, nearly every driver knows about points. Reckless driving, too many tickets, or driving under the influence are all black marks that can raise auto insurance rates. Completing a defensive driving course can remove points from a driving record. And thanks to technology, it’s possible to complete a defensive driving course completely online.
Getting a Good Car with Bad Credit
Trying to buy a car with questionable credit is frustrating. But knowledge is power. Knowing about FICO and automotive FICO scores helps would-be car buyers know what they’re up against. Improving credit scores and driving records can help buyers qualify for good car loans and avoid potential buy-here-pay-here traps.