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Don’t let car dealers run you over

Bad credit. No credit. Bankruptcy. It doesn’t matter. You want to buy a vehicle? There is financing available for you.

But at what cost? The vehicle loan you get is based on many things, a few of which you can control — your credit, the loan amount and your negotiating skills.

I remember meeting a used car dealer years ago in a neighborhood that ... well, let’s just say his neighbors were more likely than average to have poor or no credit. To give you an idea of the neighborhood, his auto lot was entirely indoors.

He told me he could get financing for someone whose credit was so bad that they’d already had three — yes, three — auto repossessions.

How bad is that credit? To an auto finance company, it’s worse than bankruptcy and home foreclosure. Why? People who go through bankruptcy or foreclosure are likely to experience that only once. Therefore, someone who has been so awful in paying vehicle loans as to lose three of them to repossession — well, that’s bad credit to an auto lender.

So what did these people pay in interest rates for their bad behavior? About 39 percent. That rate is so high that the lender is doubling his money every 22 months. Can you imagine paying almost $1,000 a month for five years to pay off a Honda Accord or Ford Taurus?

Believe me, credit matters.

People with what the credit industry calls “rough credit” pay 19 percent to 25 percent interest on their vehicle loans. That’s as bad as a credit card. And to make things worse, the lenders who approve these auto loans do not help your credit improve.

Rough-credit vehicle lenders are “lenders of last resort.” In other words, these are the only sources of financing available to you, thanks to rough credit. They are finance companies, not banks, credit unions or the vehicle manufacturer’s lending companies. They often have the word “finance” or “financial” in their names.

Not only do these lenders prevent your credit from improving as you pay them, they often actually make it worse. Credit scores are sometimes reduced when you use “lenders of last resort,” even when you pay on time.

There are ways to improve credit scores within a few months. “Credit repair” is a process where negative credit items are deleted from the credit report. I find that most people have the wrong kinds of credit on their credit reports or not enough of the right kinds of credit to have the best scores possible. With knowledge or advice alone, scores can be raised in 60 to 120 days without deleting negative items.

So, if you can plan your vehicle purchases in advance and allow several months to correctly improve credit, you will get better loans with lower interest rates.

The art of negotiation

Want a better loan? A better price? Learn how to negotiate. Read a book on it. I mean it. Practice.

When you walk into a dealer’s showroom or onto the lot, you are stepping in front of professional negotiators who practice every day. Their income depends on how many vehicles they sell, at what interest rate, and at what price. You buy a vehicle maybe every few years. Very few people drive away in their new vehicle with anywhere near the best deal they could have negotiated.

Never, ever tell a vehicle salesperson what monthly payment you want. You are not buying a payment. You are buying something for tens of thousands of dollars, and you’d be smart to get an exact price.

Negotiate the price of the vehicle first. In a totally separate discussion, negotiate the financing. If you have a trade-in, that is a third, separate negotiation.

Never let the dealer combine these three transactions.

If I could teach you just one negotiating tactic, it would be the one called “walk away.” After negotiating awhile on the price of the car, tell the salesperson you just are not happy with the price. Get out of your chair, thank him for his time and start strolling for the door. Do the same thing with the other separate deals — the financing and any trade-in. Negotiate, say you’re not happy and walk away. Just see what happens. It’s fun.

Never let a dealer tell you that the price or the financing is only good today. If they let you walk out, so what? There are thousands of cars out there to fall in love with. You really don’t “have to buy today.”

As good credit matters, so do negotiating skills.

Dave Peters is a semiretired loan officer and credit repair specialist. He is a trustee of the nonprofit organization Credit Learning Systems, which teaches college students about credit and debt. He is the author of “How Credit Really Works,” and is a guest on radio shows nationwide. E-mail him at creditmatters@atpco.com or visit www.learnaboutcredit.com.