New or first-time car buyers are often surprised at being turned down for a car loan because they have no credit history, which unfortunately has about the same effect as having bad credit.

Lenders want to see that a borrower has a good record with previous loans and credit cards. Without a history of credit, a borrower represents a risk to lenders. If they don’t know a borrower’s history, they take the low road and assume the worst.

It’s a familiar “catch-22″ situation in that you can’t get a loan to establish credit without already having credit. So what is the answer?

What is the answer?

The most common solution is to have someone “co-sign” your loan contract. Typicallly, it’s family member who has a good credit score. A co-signer plays no part in the loan unless the primary borrower fails to make payments. In that case, the loan company would have the right to seek payment from the co-signer.

A co-signer does not share ownership of your vehicle. If you pay off your loan on time and without problems, the co-signer has no further role, rights, or responsiblities. Their job is finished.

Even if you default on your loan and the co-signer has to step in and make payments, he/she still has no owership rights. The car would still be in your name. Many people who co-sign do not understand this important point.

Another point important for co-signers to understand is that a co-signed loan or lease shows up on both the borrower’s credit report and the co-signer’s as a financial obligation or debt. This may affect the co-signer’s ability to get a new loan or lease for themselves. It increases their “debt load” which is a factor that is considered when one applies for new credit.

However, on the postive side, if you pay off your loan with no problems, both you and the co-signer benefit from the good credit report.

You should take care in selecting a co-signer. Since approval of your loan will depend on their credit worthiness, the person should have a strong and healthy credit history, a steady source of income, and not have excessive debt. For most new car buyers, this will probably be a close family member.

If you have already shown a history of financial irresponsibility, you may have difficulty finding someone who is willing to assume responsibility for your new obligations. Like the banks or loan companies, your potential co-signers may not want to take on the added responsibility and credit debt load. If the co-signer is not able to take over payment when the primary borrower defaults, both the borrower’s and the co-signer’s credit score are damaged.

If you can’t find a co-signer

If you can’t find someone who will co-sign for you, you have few other options. You may have to work out your transportation needs another way while you save enough money to get started with an inexpensive used car, while building your credit history so that you won’t need a co-signer the next time. Get a couple of credit cards or department store cards, use them often, and pay them off each month.

You could also try a used car dealer who specializes in working with people with bad credit, such as Drivetime.com. They have 78 locations around the country and offer a wide selection of used cars. This type of dealer its their own loans, which means it won’t help — or hurt — your credit.

Summary

Getting a co-signer is a great way to start building your own credit history. If you make your payments on time, don’t skip payments, and don’t default on your loan, you’ll be in great shape for your next loan — without a co-signer.

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Auto insurance is one of those irritating expenses of car ownership that has no immediately obvious benefit. We pay and pay, and may never get anything in return. Teenage first car buyers are always a bit startled by the high cost of insurance.

Car insurance is one of the most expensive costs of owning and driving a car, especially for teenagers and other new drivers who can least afford it. 

In this article we’ll show you how and where to find the car insurance company for your first car that has the best rates and provides the best service.

We frequently hear the question, “Which auto insurance company is best?” or “Where can I find the cheapest car insurance?” or “What is the cheapest insurance for a 16 year old?” It would be nice if there were a quick simple answer to those questions. 

It’s a fact that you will find an insurance company that has the lowest rates for you, your car, and your personal situation than any other company.  But that same company may not have the lowest rates for someone else.  Because rates depend on so many different factors, and insurance companies are not the same in how they base rates on those factors, rates vary widely between companies.  

Furthermore, an insurance company that offers low rates in one state may have totally different rates in another state, or may not even be licensed to operate in the other state. That’s why it’s not as easy as saying that XYZ company has the cheapest rates. 

Teenagers bear the burden of the highest car insurance rates 

It’s  because teenagers cause the most accidents. Rates for a 16 year old male added to his parent’s policy can easily double the cost of the policy. Depending on the state he lives in, where he drives, and the kind of car he drives, rates could be in the range of $1000 to $3000 a year.

Choosing an insurance provider should be based not only on good rates but also on how well the company services its customers. A company with low rates but is difficult to deal with when you file a claim may not be a good choice.Here is a strategy we recommend for finding a good auto insurance company for your first car.

Learn from the experience of others

Visit JDPower.com for the results of a consumer study of major insurance companies, rated in terms of overall customer experience, policy offerings, prices, and customer service. Some of the companies only operate in a single state or only in a few states.  Not all companies are listed, especially many of those who operate in a single state.

Avoid those companies with the lowest scores. Consumer Reports magazine regularly surveys auto insurance customers from all over the U.S. Its most recent survey covered 27 insurance providers and ranks them in terms of overall customer satisfaction and fewest problems with customer claims.  It publishes results in its magazine (last published in the March 2006 issue) and on its web site at http://www.consumerreports.org/. There is a small subsciption fee but it’s well worth the cost. 

Get free quotes from multiple companies

Visit or call multiple insurance providers in your area and ask them for rate quotes. A much easier way is to get your quotes online. You can always go directly to insurance company web sites such as those for well-respected GEICO but it’s faster and easier to visit the site of a major independent broker such as Netquote .  

The benefit of an indpendent broker is that they work with many insurance companies and can do most of your legwork for you, at no cost to you. They know which insurance companies are licensed in your state, they know which have the best rates for your particular situation and needs, and they know which companies have the best service. Netquote is one of the best of this kind of service, but we can also recommend InsureMe.com. 

Check your Insurance Commissioner’s web site

All states have an office of the Insurance Commissioner. The purpose of the office is to approve, license, and regulate insurance providers in their states. Many states maintain a database of insurance companies and customer complaints against those companies, which is available for public viewing on the state’s web site.  You should check the database for problems with any insurance company you may be considering. Check this web site for links to insurance commissioners in each state.

Get your CLUE report and credit score

When you make claims against your car insurance, a record of those claims can appear in a little-known database called CLUE (Comprehensive Loss Underwriting Exchange). Insurers use the database to set your premium cost. Sometimes, even questions about your coverage to your insurance agent that do not result in a claim end up in the database. It’s common for errors to appear in the database, which directly affects what you pay for your insurance.

When you shop for new insurance, the company will order a CLUE report. If your information is inaccurate, you can be left without insurance while you work to correct the errors. You are entitled by law to get a free CLUE report once each 12 months from www.ChoiceTrust.com. The report shows you what insurance companies see about you. If you find errors or mistakes, you’ll be given instructions for filing a dispute.

Check your credit score

Most insurance companies also use your credit history report as a basis for setting your premium cost. They create an insurance score that is directly related to your conventional FICO credit score. If you have a low score that is related to late or missed loan payments or credit card payments, you’ll pay more for car insurance. Credit reports often have outdated data and mistakes that will increase your insurance cost.

You can get your credit report and FICO credit score from MyFICO.com . Look for mistakes and get them fixed as quickly as possible to minimize the affect on your loan rates and insurance cost.

Summary

Auto insurance for your first car can be expensive, but you can minimize the cost by shopping around for the best rates from the best companies.

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Having bad credit means that sometime in your past, possibly as far back as seven or ten years, you have had missed or late loan payments, repossessed property or cars, or have declared bankruptcy. You may also have an excessive number of credit cards with high balances. These factors are included in your credit history reports that come from three credit reporting agencies: Transunion, Experian, and Equifax.

Your entire credit history is summarized in a single number, called your credit score. Your score can be different among the three agencies. You can get your FICO credit scores at FICO Scores/Reports .

Your credit score determines if you’ll get approved for a car loan, how much you’ll in interest, how much down payment you’ll pay, and even how much you’ll pay for auto insurance.

Credit score range from 300 to 850. A credit score less than about 680 is generally considered by most lenders to be “poor” or subprime credit.

How Bad Credit Affects You

Very few things in life can have a more devastating effect on your lifestyle than a poor credit score. A low credit score can cost you hundreds or even thousands of dollars per month.

Credit Cards

Most prime credit cards are entirely out of reach to consumers with bad credit. And the few credit cards that are available to them (known as “sub-prime” cards) typically require exorbitant setup fees or recurring monthly fees, offer very low credit lines, often require cash deposits, and in most cases do not even report your positive credit activity to the credit bureaus.

Automobile Financing

If you are making payments on a car, you are probably paying between $5,000 and $9,000 more just for having bad credit. This added interest shows up every month in a higher payment. Take a look.

What to do

Of course, the most important thing to do is start working on repairing your credit. However, you shouldn’t expect instant results. Meantime, you may have accept loan rejections, or having to pay high interest rates and make large down payments until your credit score gets better.

Getting a family member to co-sign with you on your car loan is the most common way to circumvent some of the problems of bad credit. A co-signer is not a co-borrower as a husband and wife might be. The co-signer is only there to make payments if you stop making payments yourself. The loan is yours and remains yours, even if the co-signer has to pay. Getting a co-signer is a great way to avoid some of the problems of poor credit, and gives you some time to build your credit back by making your payments on time.

If you can’t find a co-signer, you can look at buying your car from a dealer who specializes in working with people who have bad credit, such as Drivetime.com. They have over 78 used-car locations around the country and have a wide selection of cars to choose from.

Repairing Credit Yourself

The Fair Credit Reporting Act gives you the right to dispute any and all items on your credit reports that you feel classify as inaccurate, unverifiable, or misleading. If the bureaus can not verify that the information on your reports is indeed correct, then those items must be deleted.

Disputing items on your credit report is easy. Getting results from the credit bureaus is amazingly difficult, complex, and infuriating. It is not a coincidence that the Federal Trade Commission receives more complaints against credit bureaus than any other type of business. Remember, the credit bureaus are primarily interested in protecting their profits. Investigating your challenge consumes these profits. Short of sparking a mass number of lawsuits, the credit bureaus seem to do everything in their power to discourage consumers from making progress in their restoration efforts.

Restoring your own credit is like repairing your own transmission or representing yourself a court of law; it is possible, but you must decide if you are willing to take the time and assume the risks of doing it yourself. Most people get a professional company or attorney to help them. 

Summary

Buying a car with bad credit is possible but your choices may be limited. You could be refused if you credit is bad enough, or you could be required to pay a high interest rate and/or make a high down payment. Getting a co-signer is often the right solution. It not only allows you to get the loan at a good interest rate, but also helps you improve your credit score.

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Whenever you apply for any type of credit or financing, a credit report is pulled from at least one of the three major credit bureaus. While there are hundreds of smaller credit bureaus around the country, virtually every credit bureau is affiliated with Trans Union, Experian, or Equifax.

These credit bureaus collect and maintain information on the vast majority of Americans, but they are not affiliated with the government in any way. The credit bureaus are for-profit corporations that sell your personal information for money.

Credit reports are not just a record of how you are currently managing your credit accounts. Credit reports are histories of everything you are doing with your credit now, and everything you have done in the past. The credit bureaus collect this information, list it on your credit report, and then sell it to credit grantors who wish to see your credit history before they decide to lend you money.

The credit grantors who review your credit are especially interested in any negative credit. If you have shown any tendency to pay late, or to disregard your financial commitments in the past, then the creditors’ computers will immediately reject your application. Just like when you were in grade school, your credit report is your financial report card to the world.

What Kind of Information Appears on the Credit Report?

Can I See My Credit Report?

Most credit grantors are not allowed by the credit bureaus to show you your own credit report. But you can purchase your credit report from the credit bureau for a fee. You are actually entitled to get a free copy of your report from each of the three credit bureaus once a year (AnnualCreditReport.com). Getting the free reports is a little slow, so if you are in a hurry, consider purchasing online copies of your reports from myFICO.com that you can view instantly.

With the passing of each year, your credit report is used more and more often as a yardstick to measure your character. Prospective creditors will always review at least one of your credit reports before granting you credit. Today it is increasingly common for insurance companies to review your credit before extending auto or health insurance. Many employers now check credit before they consider you for a position. If you rent, you may have already been through a credit check to determine your worthiness as a renter.

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Even when you find out your personal credit score, most people wonder how they stack up with other consumers. What’s a good score? What’s bad?

First, let’s understand that you don’t have just one credit score. There are three credit bureaus in the United States – Transunion, Experian, and Equifax. Each has it’s own data about you and your credit habits. Each also has a slightly different formula for creating scores.

Therefore, your score is almost certainly to be different between the agencies. You can get your scores at FICO Scores/Reports .

Credit scores range from 300 to 850. Most people are in the range of 600 to 750. To qualify for the best loan interest rates, you’ll need a score of 680-700 or higher, depending on the lender. Any score below this “prime” level is considered “subprime.” Mortgage lenders have recently gotten themselves in trouble by providing too many high-risk subprime loans.

The national average FICO credit score is about 680. 

It may be a surprise that average scores vary widely by state.

Midwestern and Northeastern states tend to have the highest scores, with South Dakota having the highest at 710. Other states with average scores above 700 are North Dakota, Vermont, New Hamshire, Minnesota, Montana, Massachusetts, and Iowa. States with the lowest average credit scores include Texas, Nevada, Louisiana, and Arizona. Texas has the lowest at 651.

Factors that can damage your credit report include late payments, insufficient credit references, high credit card balances, and bankruptcy.

The first step to improving your credit score is finding out what it is — from all three credit agencies. Get both your detailed credit report and your credit score. Then take the necessary steps toward a better credit score. Make payments on time, reduce outstanding debt, and correct any errors that might be in your credit reports.

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David, 17, recently graduated from high school, landed a good paying job, and wanted to buy a new car.

His thought was that he would go to his neighborhood Ford dealer where he had been admiring a bright red Focus model that he felt he could afford, and arrange for a convenient loan to pay for it. He could easily get approved for the loan because his father knows the owner of the dealership. 

The car cost $12,000 with discounts and rebates. He thought a 5 year (60 months) loan would be about right because he figured payments to be $200 a month ($12,000 divided by 60 months), which he could easily afford.

David was wrong — in many ways. Let’s see why.

So what’s wrong with David’s thinking?

Age Requirement
First, he must be at least 18 years old  to be legally responsible to sign contracts, including sales contracts and car loan agreements. He would have to show proof of age before signing.

Loan Approval
Second, ignoring the age problem for a moment, car dealers don’t approve loans or make loans, so it doesn’t matter that David’s dad knows the owner of the dealership. Dealers work with banks and finance companies to arrange loans for customers. It’s the bank or finance company who approves loan applications and grants loans. Dealers sometimes “screen” customers as preliminary way to weed out customers who have impossible credit. 

Credit History
Next, having recently graduated and just getting a new job, David does not have an established credit history. He has never had a credit card, department store account, or a loan. The fact that he has a new job doesn’t help if he’s been working less than 6 months.

If he was old enough (18 or older, see above), he could get a family member to co-sign the loan agreement, which would help him get approved. A co-signer would be responsible only if David fails to pay on his loan.

But since David is not yet 18, he can either wait until he becomes of legal age, or he could have his parents buy a car in their name and add him to their insurance policy as the regular driver.

Calculating Payments
Finally, David doesn’t understand how car loan payments are calculated. It’s not a simple matter of dividing the car’s cost by the number of months in the loan.

In fact, it’s a rather complex business math calculation that takes into account a monthly finance charge (interest), that will significantly increase his total cost, especially for loans 60 months long that have higher interest rates than shorter loans. The calculation must be performed with a business calculator or online auto loan calculator.

Length of Loan
Furthermore, even if David were to be able to get the car loan, a 60-month loan is too long for a teenager  who will become tired of his car long before 5 years is up. More than likely, his tastes will change and he’ll get future pay raises that will allow him to afford (want) better, more expensive cars. 

Unfortunately, with such a long-term loan, he’ll be “upside down” for most of the term of the loan, making it financially troublesome to try to sell or trade before the loan is paid off. He may be tempted to trade and have the dealer roll his “negative equity” into a new car, which is not usually a good thing to do.

Other Costs
Further still, we wonder if David has considered the other costs of owning and driving a car. A car’s purchase cost is only a part of the overall cost of ownership. As a young male driver, his monthly insurance costs could easily exceed his loan payment amount. Then there’s gas, maintenance, repairs, tires, taxes, and license fees.

Summary
Unless someone buys a car for David, he should wait until he is at least 18 years old, has a stable income, has an established credit history, and understands how car buying and financing works.

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Most car dealers do not directly finance loans on cars they sell. They work with outside banks and finance companies to provide loans for their customers. It’s up to those banks and finance companies, not the dealer, to approve and provide customers car loans.

However, a different breed of used car dealer, called  ”buy-here-pay-here” dealers,  do provide their own financing without an outside bank or loan company. They primarily function to sell used cars to people who have bad credit and cannot get approved for loans from conventional sources.

Buy-here-pay-here (BHPH) dealers can be recognized by their promotional ads or storefront signs. They use the terms “easy finance” or “no credit checks” or “we finance anybody” or “in-house financing” or “fast loan approval” or “we approve you regardless of your credit.”  They are sometimes called “tote the note” dealers.

How do buy-here-pay-here dealers work?
BHPH dealers typically sell older used cars for higher-than-market prices. They may ask for a down payment that essentially covers their investment in the car. Then the customer pays off the rest of the amount with a high-interest loan, which is the dealer’s profit.  There is no credit check because the interest rate charged is the highest allowed by the usury laws in that state.

The loan might be divided into 12-18 months of payments that are set up on a strict weekly or bi-weekly schedule. In many cases, the payments must be made at the dealership in cash or money-order. Personal checks are often not accepted.

Many BHPH dealers use special devices on the cars to make sure that customers pay on time and don’t skip town. One device is a starter interrupter. If a customer is late with one payment by even a day, the car will not start, and cannot be reenabled until the payment is made and a special code is punched into the device. If a payment is missed (late by more than a couple of days), the car will be immediately repossessed — no 30 day grace period. A GPS locator device hidden on the car tells the dealer where the car can be found.

If a car is repossessed, it is usually placed back on the sales lot to be sold to the next customer. BHPH dealers normally do not report repossessions to credit agencies. In some cases, a repossessed car might be sold at wholesale auction and the customer billed for the balance of his loan. This can happen if the car has been damaged or wrecked.

Should you use a buy-here-pay-here dealer?
Buying a car from a buy-here-pay-here dealer is an expensive option, but if it is your only option, and you know how it works, then you can use it.

Make your loan as short as possible to reduce the effects of the high interest rate. Have the car inspected by a qualified mechanic before you buy because such cars are sold “as-is” without warranties or guarantees. The dealer is not obligated to fix problems after the sale. Check out the dealer at your local Better Business Bureau (find their web site or call them on the phone).

Don’t expect your credit to improve if you make all your payments on time. Just as BHPH dealers don’t check your credit when you buy, they also do not report your good (or bad) payment record to the credit agencies. Unless your credit score improves for other reasons, you’ll end your loan with the same bad credit as when you started.

Summary
In summary, buy-here-pay-here dealers exist for a reason: to sell cars to people who have bad credit or no credit and are not able to buy a car any other way. On the other hand, they are often viewed as predatory, taking advantage of people’s misfortune with high prices and maximum-allowed interest rates.

You may be able to get a better deal from conventional discount used car dealers in your area. You can get free prices quotes from these dealers from the UsedCars.com web site. These dealers may also be able to find you a loan source.

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Most of us get our first car as teenagers. It’s the car we’ll always remember.

Let’s take a look at some of the important questions you’ll want to consider when deciding about what you’ll buy as your first car, how you’ll pay for it, and how to go about the purchase.

How much can you spend?

If cost is not important and you can choose practically any car you want, we’ll get to you later. However, most teens have restrictions on how much they can spend. It might be that parents are buying and have set a price limit, or that you have your own budget and limited income.

Since most teens start driving before they become of legal age to sign a car loan contract, it’s typical to pay cash for their first car. The cash can come from savings, gifts from relatives, or a loan from parents — or a combination. Usually, it’s not enough money for a brand new car, but possibly sufficient for a good used car.

The amount of money you have to spend on your first car will directly affect your choices. Lots of money, lots of choices. Little money, fewer choices. In general, the more money you spend, the better the car — better condition, better mileage, better performance, better safety, and better reliability.

If I only have $2000 or $3000?

Two or three thousand dollars is not very much money for an automobile. It’s certainly not impossible to find a good used car for that price range but it will require a lot of searching and legwork, particularly if you restrict yourself to only certain makes and models. Most cars in this range will be junk. Your job is to find the jewel in the pile of junk. Don’t become over-anxious. Take your time. You’ll be glad you did.

The following article, Cheap Cars, explains where and how to look for inexpensive cars. This information should be a great help to you in your search.

Needless to say, any car you find should be thoroughly test driven and inspected by a qualified mechanic before you buy.  Do not take the word of the seller regarding a car’s history or condition.

Also think about the additional money you’ll need for insurance, taxes, oil, gas, tires, and repairs. Insurance for young drivers can easily be the most expensive part of car ownership. Will your funds or income take care of these additional costs?

What can I buy with $15,000?

Buyers with more money to spend have more choices. With $15,000 or more, you have the option to buy either a new car or used car.

A number of new makes and models fall into this price range, such as the Kia Spectra, Toyota Corolla, Mazda3, Scion xB and xD, Honda Fit, Nissan Versa, and Toyota Yaris.

Good used cars in this price range that are no older than 2000 year models are: Honda (Accord, Civic, CR-V, Element), Nissan (Altima, Maxima), Toyota (Camry, Corolla, Highlander, RAV4, Matrix), Mazda (MX-5 Miata), and Suraru (Impreza, Outback).

What if I have more than $15,000?

More money buys more car and more choices. Most new cars fall into the price range of $15,000 to $30,000. Consumer Reports magazine lists Toyota, Honda, Scion, Acura, Lexus, and Subaru as the top 5 brands in terms of reliability.

If you want to buy a previously owned car, you have many used luxury models to choose from. Lexus, Acura, and some BMW models are good used-car buys. Beware of Mercedes, many BMW models, Jaguar, Audi, and Land Rover. These makes have higher-than-average problem rates.

Can I get a loan?

Not unless you’re 18 years old (or older, in a few states). However, if you are at least 18, you may be able to get a loan. If you don’t yet have an established credit history, you may have to get a co-signer. A co-signer is usually a parent or family member with a good credit history who is willing to accept responsibility for your loan if you should fail to pay. A co-signer is not a co-buyer or co-owner. For more details, see the article, Can I Get a Car Loan.

What is a good first car?

Most teenagers choose smaller, more economical models such as the Honda Civic or Toyota Corolla. But tastes vary by region of the country and even by city. Car models that are considered not cool in one region may be well respected in another region. Peer approval is an important factor for teens when choosing a first car.

Generally speaking, Japanese cars will have higher quality, better reliability, and higher resale value than their American or European counterparts. There are exceptions, of course. The following article, Which Car Should I Buy?, makes some specific recommendations, based on your needs.

Should I buy new or used?

The amount of money you have to spend on your first car is a major factor in determining whether you buy a new car or a used, previously owned car. The cheapest new cars sell in the range of $13,000-$16,000. If your budget is smaller, or you don’t like the low-priced new cars, you’ll be looking at used cars. The following article, First Car: New or Used?, contains more details to help you make your decision.

Where is the best place to buy a car?

If you’re going to buy a brand new car, you’ll buy from an authorized automobile dealer who sells brands from one or more manufacturers. You can get free online price quotes at Yahoo! Autos . The prices are already discounted by local dealers. See the article, How to Buy a New Car, which gives you important tips and buying techniques. 

If you’ll be buying a used car, you have a choice of places to buy: from an individual, from an auction, from an independent used-car dealer, or a new-car dealer who has a used-car lot. You can browse local newspapers, free “autotrader” magazines at your local supermarket, used-car consignment lots, online at Craigslist.org, , or Autotrader.com. One of the best online sources of used cars is UsedCars.com. You simply plug in your ZIP code and the kind of car you want, and you get back a detailed list of cars in your area, with prices.

What’s important to you?

Consider the things that are most important in the car you want. Is it style and looks? Is it performance and speed? Is it safety? Reliability and dependability? Cost of operation and gas mileage? Room enough for friends? Coupe, sedan, convertible, small SUV, large SUV, or truck? Color? Certain features, such as premium sound system?

Make a list of the things that are most important to you and use the list as you evaluate cars. Don’t let your emotions get in the way of good sense. If your budget prevents you from getting your dream car, remember that you will be able to afford better cars later. Be patient and don’t over-extend your finances.

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