How to Buy a Car with Poor Credit and Zero Down

We've all seen the late night and Saturday morning infomercials aimed at people with poor credit ratings who need to buy a car. They will sell you a car, but you are going to pay through the nose. You could end up with an interest rate as high as 20 to 28% annually. If you have a credit rating of 720 or higher you can get financed for as low as 3.9%, during special promotional deals. Most people I know, except for my father-in-law, don't have perfect credit. No matter what your credit rating, you may be paying too much for that new car. I don't have perfect credit and I just bought a new 2007 Toyota Corolla CE for over $1,000.00 below invoice and I negotiated my interest rate and loan length down. Oh yes and here is the best part. I paid zero down and I have 45 days until my first payment is due.

Now that I have your attention, I'm going to show you how you can be driving away in your dream car in eight easy steps and in five days, with no money out of your pocket (except for insurance, if you don't already have auto insurance).

Step 1: Monday - Get pre-approved online.

Pre-financing is the single most powerful tool you have. It takes about 24 hours to get pre-approved online. I went to Road Loans (http://www.roadloans.com) and filled out the simple online application. The next day I received an email stating that I was pre-approved and I was given a number to call to complete the application process. I called and after verifying my information my approved financing paperwork and a blank check was expressed mailed to me. I was approved for a loan for $22,000.00.

I went to other sites and some were able to approve me for a larger amount, but the terms with Road Loans worked best for me. I suggest you apply to no more then three companies at a time. Depending on your credit rating you may get a better offer from certain sites then others. Just as auto insurance companies specialize in drivers with poor driving records, there are loan companies that specialize in consumers with poor credit ratings.

If you have good credit, get pre-financed through your bank or credit union. Never get pre-financed through the dealer. If your interest rate is too high or the length of the loan is too long, it will not matter how great of a price you bought your car for, you will pay thousands more then you thought you saved.

Step 2: Wednesday - Budget car loan your payments.

Wednesday evening I came home and my pre-approved loan papers were in my mail box along with the blank check. Now that you know what the maximum you can spend and what your loan rate is and the length of your loan, you are ready to decide how much car you can afford, to do this logon to any car dealer site. Most have the option for you to estimate your monthly payments based on interest rates and loan length. Please don't waste your time looking at used cars, even certified pre-owned. Why do you want someone else problems? You are only interested in a new car. You have the most buying power with new cars.

I went to Car Max (http://www.carmax.com) and looked at cars I liked. Once you find a car you like click on the link that will show you more information about that car. You will usually find a payment estimating calculator link. For example, a car with a sticker price of $16,818.00 after tax and licensing and zero down (not even a trade-in) the total finance cost is $18,018.00. With an interest rate of 12.9% and a loan length of five years your monthly payments will be approximately $409.04. Your total repayment cost will be $24,542.40. Now if you wanted to keep your monthly cost lower for the same car you could take a year longer to pay off the loan. The same car will cost you $360.74 with six years to pay it off; your final cost will be $25,973.28. You save $1,430.88 by paying off the loan sooner. But sometimes the lower payment is worth the extra cost to the loan. Don't worry about this too much right now, I'll show you how to negotiate this part in step eight.

Do this for several price points until you find the price range that fits your budget, with your pre-approved loan rate and length. So if you want to keep your payments around $400.00 a month, you will keep the sticker price (including extras) to around $16,800.00 or less. Now that you know your budget you can move on to step thee.

Step 3: Research and choose your car online.

I sat down with my wife and we decided what we were going to use the car for, since this was going to be our second car. With the rising gas prices we wanted a car that was good on gas, but we could also fit the entire family in comfortably. Having completed step two, I knew what price range I was looking at. So, now it was time to hit the Internet again.

I went back to the dealer site. I searched on cars that fell within my price range (less tax and licensing). Then I looked at the specs for each car. I decided on the 2007 Toyota Corolla CE, with an automatic transmission (so my wife could drive it also). Car Max had one with a MSRP (sticker price) of $15,743.00. Car Max offered it for a "No Haggle Price "of $14,998. The listed invoice price was listed as $14,852.00. That price is $745.00 below MSRP and only $146.00 above invoice. This is well within our budget based on the example in step two.

Now you need to verify what the dealer is telling you are true. So off to the Toyota site to verify what the MSRP is for the 2007 Toyota Corolla CE is. According to Toyota the Starting MSRP for the 2007 Toyota Corolla CE, with an automatic transmission is $15,005.00 plus $620.00 destination charge, for an MSRP of $15,625.00. There is a $118.00 difference in the Toyota site MSRP and the Car Max MSRP. This difference is usually due to accessories such as floor mats. I suggest you do this step for a several cars that fit your budget and needs, before moving on to step four.

Step 4: Thursday - Compare insurance rates.

You can save a fortune on your car and spend it all on insurance. Next you compare insurance prices. Avoid the double talk of insurance salesmen. Logon and get instant quotes from at least three insurance agencies. If they want you to call for a quote move on.

Let's say you found three cars that fit your needs. Enter in a quote for each car at each site. This will take some time, but it is time well spent. The sites will usually store the quote for you and lock the quote in for a few days. Write down the Quote numbers for each quote. You will need it when you purchase your car. Now you have three quotes for each car and you now know what the cost of insurance will be for your new car. This can save you money in more then one way. I'll show you how to use this tool later in step eight.

Step 5: Friday - Get the best possible price for your car.

In the example in step three you are already getting your car for $745.00 below MSRP and only $118.00 above invoice. This is a good price, but we can do better. To get the best price on new cars you need to turn to the Friday news paper. Friday is when all of the car dealers place their loss leader ads. These are the ridiculously low prices that they never ever intend on selling that or any other car on their lot for. That price is to lure you onto the lot, so they can sell you a car for several thousand dollars above MSRP.

I went through the auto ad section of my local paper and found several dealers that were having sales on the cars I was considering. I decided on a dealer that advertised a 2007 Toyota Corolla CE, automatic with an MSRP of $15.573.00 for $12,977.00. It advertised that this price was good for all Corolla CE models at that MSRP. That's a savings of $2,596.00 below MSRP and according to the example in step three that's $1,875.00 below the invoice price of $14,852.00.

FYI: Invoice price is the price the dealer paid for the car. At least it is the suggested price the dealers say they paid for the car. Why would a car dealer sell you a car for $1,875.00 below invoice? The answer is they have no intention of selling you any car for $1,875.00 below invoice. The loss leader ad is meant to only lure you onto the lot.

Here is an exercise you should do before moving on to step six. Say to yourself: "This is the car I'm going to buy and I will not pay a penny over the advertised price". Say this until you believe it. It may sound silly, but salesmen do this everyday. They pump themselves up by telling themselves that they will sell you a car today. So you had better go in with the same mind set.

Step 6: Friday evening - Time to meet the dealer on his home turf.

Before you leave for the dealer, you will need to take the following things. You will have either a blank check or pre-approved financing papers from your lender. Take only the papers you will need to finance the deal. With Road Loans, I only needed to take the blank check, which I will fill out for the final cost after I purchase the car. None of the paperwork I took told the dealer what my interest rate was. It only gave them the information they needed to verify that the loan is actually pre-approved.

Take the dealers ad with you. Keep this close guard it with your life. Take ads from other dealers with you also. Be prepared to walk out and go to one of the other dealers. Trust me, no car dealer would let you do that. They are in the business of selling cars. You will need your driver license to take a test drive. If you have current insurance take those papers with you. If you don't have insurance leave the quote at home. If you're married, leave your spouse there also unless you need them to sign the loan papers. If you can't leave your spouse leave someone you can trust such as your son or daughter. Leave your banking information home also. Why do you need it? You are already financed.

Now drive down to the lot and when the swarms of salesmen mob you select one and show him the ad and say "I want this car at this price".

Step 7: Hold your ground.

The first thing they will tell you is that the car is sold, or it has lot damage on it or some other dumb excuse. Next they may try to steer you towards a used car. Why would a salesman try to sell you a used car instead of a new car? The answer is simple; they make more money on used cars. A used 2005 Ford Focus that has a sticker price of $9,977.00 may have only cost the dealer $2,400.00 as part of a trade in on the last deal they made.

So keep walking towards the car you selected. The salesman will follow. The next thing they will tell you is that they can't find the car in the ad. They will promise to make you a comparable deal on a similar car. At this point go along with the salesman. Pick out a car and do a test-drive.

Now, they will sit you down and show you some ridiculously high numbers. They will try to get a down payment and or trade-in from you. Remember I did this with zero down, not even a trade-in. If you have a trade-in oe down payment use them. But do the research to get the Blue Book value of your car. Use your trade-in and down payment to get more car for your budget.

Using the example in techniques learned in step two I already know my monthly payments will be around $319.01 per month with an interest rate of 12.9% for a period of five years. That's a $90.03 savings per month of the original $409.04 monthly payment we originally calculated. So when they tell you that your monthly payment will be $625.00 per month with zero down, you just pull out your ad and tell them that you can pay just a little over $300.00 per month with the pre-approved financing you have in hand.

This back and forth process may last a couple of hours. So what? You have all night. Besides you are going to save over $2,500.00 in the process. Keep your cool and don't argue the point. Hold your ground. You want the car in the ad at the price in the ad.

After an hour or so the salesman came back and told me the ad was a miss print and the cars on sale actually have an MSRP of $15,715. And to my surprise they found a few. So my actual savings from the new MSRP was $2,738.00. This was an additional savings of $142.00.

Now that you have a great price the dealer is going to try to make some of that money back. They will try to upgrade you. Don't fall into this trap. Make sure you research the accessories before you go to the dealer. Better yet wait until you get into financing. They will ask you again and drop the price on the options. Now that you have a great price it's not over yet.

Step 8: Negotiate your interest rate.

I know you are pre-financed, but at this point the dealer is going to try to make some money back. They will offer to finance you. They will offer you a lower rate. Take it. I had my rate dropped by two percentage points. If my interest rate was lowered by only 1/2% my monthly payment would have drop to $315.43 per month, for a five year loan.

Another way dealers make their money is from interest rates. When you are qualified the financing company quotes an interest rate based on your credit rating to the salesman. The finance manager then marks up that interest rate. The difference between what the dealer is quoted and what you pay goes to the dealership. Now, if they can beat the interest rate you have in hand why wouldn't you want to save money.

Now that you have a great price and a great interest rate you are not done. You can't drive off the lot without insurance. If you have coverage you can just give them a copy of that. Or you can pay to get 30 day coverage which was quoted to me at $250.00. Or you can take option three.

Remember that person you left at home, give them a call and tell them which quote you want to use. Have them logon and complete the application. They will need the year, make, model, The lean holder information (who you have the loan through) and VIN (Vehicle Identification number) of the car you are purchasing. I used Progressive; they had an option where I could fax a copy of my coverage directly from my computer to the dealership and/or the loan company.

Once they have your insurance information, you are ready to drive away in your new car. This may sound like a lot of work, but if it could save you over $2,700.00 for just a few hours of work per a day. Now you are ready to go out and buy the car you want at the price you want.