Used-Car Buyers Get Less, Pay More

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By Terry Jackson
Bankrate.com

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:

• 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.

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.

If you have a question for Terry, e-mail him at Driving for Dollars. Save money on your car -- sign up for Bankrate's new weekend Car & Money newsletter

Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.

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