Is it Better to Buy or Lease a Car After Bankruptcy?

Is it Better to Buy or Lease a Car After Bankruptcy?




If you want to get approved at the best possible terms when buying a car, it’s important you know a car lender’s credit guidelines before you apply for credit…especially if you’re bankrupt.

It will save you time and frustration–but more importantly, it will help you avoid credit inquiries that may lower your FICO credit scores up to 12 points per inquiry.

Step 1 in making a lease or buy decision is to determine a lender’s credit guidelines.

You start by asking if they lend to people with a bankruptcy. If so, on what terms?

That’s right. You have to be upfront that you’ve filed bankruptcy. Don’t hide it. We have to confront the fact that some dealers just won’t work with people who’ve filed bankruptcy. So our job is to find the ones that do.

Some lenders will only lease to people with a bankruptcy. Others will only offer buy financing. however nevertheless others will only lend using a hybrid of the two–this is especially shared in Texas.

Ask the finance director at the dealership to direct you as to what structure the manufacturer prefers.

And here’s a quick tip for you: if your bankruptcy doesn’t appear on the credit report your lender pulls–then, in the eyes of the lender, you’re not bankrupt.

The only lenders I would consider using are:

– First choice: Captive lenders (car manufacturers)

– Second choice: edges (not finance companies)

– Third choice: Credit unions

Ninety-nine percent of the cars I’ve leased over the years have been with captive lenders. Just one was leased by a bank.

That particular deal came from a conversation I had with Amy, the finance manager at the local Land Rover dealership here in Indianapolis. I told her I was open to her financing recommendations, but I preferred financing by the car manufacturer.

I told her my current FICO scores. She closest said that with my scores she could do better by a local bank. I signed a credit application and told her to go for it.

The next day I signed a lease agreement with that local bank. Being open to her advice literally saved me hundreds of dollars a month on that car.

So be flexible…but be careful. It seems most car dealers call all of their funding supplies edges. When in reality some are edges, some are credit unions, and most are sub-chief finance companies.

Here is a list of some of the most commonly used sub-chief auto finance companies:

1. HSBC Automotive

2. Capital One

3. AmeriCredit

4. WFS Financial

You want to pass on the sub-chief finance companies–unless you have depleted all other options. Sub-chief lenders should be your last resort.

And only use credit unions if they report to all three national credit reporting agencies. How do you find out if a credit union reports to all three credit reporting agencies?

Simple–you ask. Ask the branch manager at the credit union if they report. And after you get the loan, check all three of your credit reports and make sure their trade line appears on each one.

The three worst luxury captive lenders to lease or buy from after bankruptcy are:

1. BMW

2. Mercedes

3. Porsche

The three worst mainstream captive lenders are:

1. Honda

2. Kia/Subaru

3. Toyota

What makes these the worst?

Once these lenders see that you’ve filed bankruptcy, they are less likely to work with you. However, if they are willing to work with you, they’ll want you to be at the minimum several years from release and have perfect credit during that time.

Now that I told you how bad the above six lenders are–there are times where they may offer you good deals. For example, if one of the above happens to be the biggest dealer in your area, they may be able to offer you special deals that a smaller dealer can’t.

Of course, things change all the time with captive auto lenders. They change their credit guidelines on a whim to meet their own financial goals. So, it’s always a good idea to at the minimum research these dealerships–just don’t get your hopes up too high.

OK, so you’ve done your research and narrowed down your choice to one or two car manufacturers.

Step 2 in making a lease or buy decision is to buy your FICO credit scores.

It’s important you have your most recent scores when you talk to car dealers (just like I did with Amy). It puts you in charge.

When you go into a dealership with your FICO scores, the dealer will know you’re a more informed consumer and cannot be taken advantage of. Just know that the FICO credit scores auto dealers use are a little different than what we see as consumers. The scores the dealers review are called FICO Auto Industry Option Scores. The good news…these FICO scores may be higher than your normal FICO scores if you paid all past auto loans as agreed.

Some car dealers have told me that if your FICO scores are higher than the scores the dealer reviews–they may already use your scores to get a better deal.

You can buy your scores from myFICO.com.

Step 3 is to interview the remaining car dealers on a deeper level.

Start by asking them these questions:

– Which credit reporting agency do you use to make a lending decision?

– What is your minimum credit score requirement to get approved?

– What credit score is needed to get the best interest rate?

– Do your lenders prefer offering lease or buy financing to a bankrupt debtor?

– What incentives are there to lease or buy right now?

At this point it’s important to keep open to either leasing or purchasing. estimate your options and incentives. Remember, you’re buying the financing. In other words, the most important factor is the willingness of the lender to loan you money.

I personally view the lease versus buy decision in three ways:

1. If you’re recently recovering from bankruptcy, the only thing that matters is if you can get approved at an interest rate you can provide by a lender that reports to all three national credit reporting agencies. So you should only consider lenders that are bankruptcy friendly.

2. Once your credit scores begin to increase, you can start selecting cars based on which credit reporting agency the lender uses to determine if you qualify. clearly, you should choose the lender who uses your highest FICO credit score to make a lending decision.

3. When your scores are high enough…or two years have passed after your bankruptcy…or your bankruptcy doesn’t appear on the credit report the lender uses, then you can choose almost any car you like. But make sure you nevertheless do your research and use your credit scores to help you compare interest rates, terms and incentives.




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