Most lenders look for credit scores above 700 to lend to. In today’s economy maintaining a 700 plus credit or beacon score takes a lot of work and discipline. You must pay all of your bills on time and live within your means in order to maintain a positive credit rating.

Since interest rates are based on risk it is fair to say that the lower the beacon score, then the higher the interest rate. When consumers do not repay debts within the terms that they agree to with a lender their credit rating is affected. Once your credit is affected it can take years to repair it and get it back to a 700 plus score.

There are several factors that go into a credit/beacon score.
Some examples are:
a. The amount of debt you owe relative to the high credit a particular bank has loaned you (in other words your maximum credit line).
b. Slow payment history or in other words not paying a certain creditor on time.
c. Allowing too many creditors to pull your credit report. This happens when you are shopping for financing through a dealership or other potential creditor. When you sign a credit application you are allowing them to look at your credit and also authorizing them to send your credit to as many banks as they see fit.

When a conventional lender is not willing to take a risk on your credit as a result of a lowered beacon score then you are automatically moved over to what is referred to as the subprime market. The subprime market is primarily for higher credit risks. Remember the higher the credit risk the higher the interest rate—when you are placed in the subprime category you will pay more interest for items that you cannot afford to pay cash for. That means a higher interest rate on credit cards, cars, home loans, boat loans, etc.

So keeping on the topic of cars and the subprime market, let’s explore two different types of subprime lenders.

The first is the larger subprime lender: these lenders cater to the beacon scores that range from 600 to 690. They offer rates that are usually 6 to 8 percent higher than conventional rates so usually anywhere between 12.50 to 19.00%. Often, these lenders require a significant down payment to minimize their risk. The lender dictates the type of car you are able to buy as well as the loan terms. The lender charges the dealer a loan acquisition fee. This fee is basically profit in their pockets to offset their losses on the back end as their repo rates will be higher than conventional lenders. These lenders will generally require an automated debit from your checking account for monthly payments.

The next type of lender in the subprime market is the Buy Here Pay Here lenders/dealers (BHPH). When you are buying a vehicle from a BHPH dealer you are considered the highest credit risk. The average credit score for a BHPH client is 500 to 600. Most BHPH customers have usually been rejected by traditional dealers and the first category of subprime lender. These customers have most certainly not paid his/her bills on time or not at all.

BHPH car dealers know that their clients are high risk and therefore set an average interest rate of 29%. After doing research on the BHPH market most dealers charge the maximum the state allows. All BHPH dealers maintain detailed records of who your friends and family are and keep up to date information on where you live, work, worship and/or go to school. Generally they mail out free oil change coupons or some other type of gimmick or giveaway to get you to come in so they can update your records.

They all verify every piece of information on the loan application before they let you leave in the car and the average cost of the cars that they sell is $3,000 to $14,000. If you are forced to buy a low end cost car at about $3,000 they will require at least half of the cost of the car for a down payment. If you get to a higher value car then the BHPH dealer requires a more significant down payment and the higher value vehicles usually go to the established client or the repeat client.

Usually, the BHPH dealer requires a large down payment. The typical down payment is equal to about 60 to 70 percent of what the dealer paid for the car.

The average BHPH dealer does not spend a lot of money up front on the maintenance or repair of the vehicles they sell. This includes cosmetic items as well as mechanical items. They generally wait until the client pays them for 6 months or so. This tells them the trend of how that particular client will pay them for the life of the loan.

Most BHPH dealers do not report to the major credit bureaus in an attempt to control the client. So while you may be making on time payments, a criteria for improving your credit score, this information is not reported and therefore not affecting your score. This keeps the clients credit score low so they do not have the ability to move from a BHPH dealer to a subprime or conventional lender.

The average gross profit for a BHPH dealer is $4,500 to $6,000. This sounds extreme, but they are lending to clients that have a proven track record of not paying their creditors in a timely manner. Also it takes the full loan term for the dealer to collect his full profit.

The average loan term is 30 to 42 months. BHPH dealers collect their payments weekly to ensure they are the first to get their payments before their clients pay anyone else.

The automotive industry had a very difficult year in 2008. A credit crisis, volatile gas prices, both inflation and deflation, and other economic factors combined to create some unprecedented economic challenges for both new and used car dealers. While franchise sales and profits declined, BHPH dealers did not suffer the same fate.

The car industry lost approximately 5000 franchise and independent operators in 2008. Prudent operators will provide financing to better credit quality customers only after increasing their down payments and repayments from historic levels. Such increases will enhance their profits and cash flow and reduce their losses and mitigate risk. These changes are necessary because capital availability when America emerges from this recession will be more limited.

If you have had credit problems and you do not want to limit your choices please go see a representative at your credit union. These credit union employees are trained to help you understand your credit as well as guide you to make wiser financial decisions.

Please do not let your low credit score hinder you from going to your credit union and working to reestablish your credit score. Credit union representative can help get you into a car that is reliable with an interest rate that is based on your total picture.

Do not allow yourself to think that you have no options when it comes to buying a car. You are in control of your own credit and also what interest rate you will get when you do come in to apply for a loan.

Learn more about the car business with a free consultation with a MAC representative nearest you.