Many used-car buyers pay more for less

By Bankrate.com

Are you in the market for a used car? And do you 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 scores -- amalgams of information about their past credit histories, incomes and other finance activity -- were below 650. Credit scores range from 300 to 850, and the median score among all consumers is 723.

Low credit scores don'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%.

To raise your credit scores, it's crucial to pay your bills on time. It is also important to not have a lot of credit inquiries over a short period.

Still paying for an old car

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% 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 midsize 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.

That last point is particularly troubling when combined with the length of the loans. It means that the average subprime buyer, assuming they keep the car until the loan is paid off, will be making payments on an 11-year-old car.

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.

4 better options

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 four years, with three years being ideal. That way, you will own the car sooner and are less likely to be burdened with both car payments and repair bills.
• Consider sticking with what you have. Even if you have to make $1,000 in repairs to the car you own to make it more reliable, that's better 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.

This article was reported and written by Terry Jackson for Bankrate.com.

Published Sept. 21, 2007