Divorce is often the catalyst for landing an ex-couple's credit scores in the toilet. Last year Credit.com surveyed 526 divorced adults and found that more than 31 percent suffered a credit score drop following the break-up of their marriage. Especially for a lesser-earning spouse, or a spouse who did not work at the time of the split, securing a loan with attractive terms can be a real challenge. This can seem overwhelming if you are low on funds and need to buy a new car.
Even for those with severely damaged credit or no credit, period, all hope is not lost, says Matt Jones, Edmunds.com senior editor. "Even if your credit is wrecked in the divorce, you still have options for financing a car," says Jones. "People with no credit are not always raked over the coals of auto financing."
Before you set foot in a car dealership, pull your credit report and history, and look for any negative scores. In a divorce, any joint debt held by both spouses continues to be reported on both credit reports until the note is retired or one party's name is removed from the contract, says Gerri Detweiler, director of consumer education for Credit.com. "If you still have a joint auto loan on the vehicle your ex is keeping and supposed to be paying, that car payment affects your credit score and could affect your lender's evaluation of your ability to take on another car payment," she explains.
Consider working with your ex to remove your name from any outstanding debt, and the title to any vehicle you are attached to but no longer own. This will protect your credit score from your ex's late or missed payments in the future. To separate your financial history from your ex's, take these reports to any lender with whom you hope to work. Any negative history will impact your credit score for up to seven years. But if you understand the details of your credit history and identify any errors on the report before speaking with a lender, you'll be able to make a stronger case for your qualifications as a borrower.
If you face a low credit score and an unreliable recent income history, it's time to get down to business. Here's a plan of attack for landing an auto loan with affordable terms:
Get Pre-Approved
Detweiler suggests trying to get pre-approved for a car loan with a bank or credit union before walking into the dealership. In the event the dealer has to shop your application to multiple lenders, each will create an inquiry on your credit report, which can impact your score.
Be a Loyal Customer
Edmunds' Matt Jones says that dealerships give preferential treatment to devoted customers. If you co-owned a Honda with your ex, show documents that indicate that ownership to the dealer. "Dealerships know it is less expensive to sell to a loyal customer than to find a new one," Jones says. "If you can show you had a strong history with the manufacturer, there is a good chance they will take you back."
Prove Your Income
Credit history aside, any lender will want to verify that you have sufficient income to cover any car payments, Detweiler says. In nearly every divorce, each person's income is lower than when they were a married couple. "If you are newly divorced and your income has changed dramatically as a result, you may find it more difficult to qualify," Detweiler says.
That said, income is income, and if you now receive spousal or child support, or recently landed a part-time job, the lender must consider it all equally. However, if this income is new, it could potentially be difficult to prove its existence. "It can be helpful to show proof of deposits through bank statements," Detweiler says.
Make a Decent Down Payment
A down payment of $1,200 or $1,500 is usually enough to open the financing door, Jones says. "That seems to be the price of admission for working with lenders," he says.
Tell Your Story
Electronically generated credit scores are not the only factor in lending decisions. Humans have a say, too. "Tell the lender the story of what happened," Jones says. "If you can prove that you have always been responsible and explain your recent change in credit history, that can go a long way."
By showing your credit and income history; records of consistent, on-time payments; and bank and loan documents proving a stable work history, it is easier to prove that your recent change in family status is indeed a temporary challenge.
Consider a Co-Signer
A solid last resort is to find a credit-worthy co-signer who is willing to help out. This person should have a stable history of credit, income and residence, as well as proof of the ability to cover the loan in the event you lapse. Immediate relatives — especially those who live nearby — are the most attractive to lenders, Jones says.
Do Not Despair
In most cases, people with no credit or poor credit do find reasonable financing for a car. If you are forced to accept a loan with a high interest rate, you can always refinance or buy another vehicle under better terms in a few years when you are back on your feet and your credit has improved.
"I've seen people go from qualifying for terms of 13 percent APR to 2 percent APR in two years," Jones says. Again, sticking with the same lender during this transition period can better your chances of graduating into more attractive terms.
And remember: The negative impact of divorce, like most things in life, does not have to last forever. In fact, the Credit.com survey found that 37 percent of respondents saw their credit score improve post-divorce.
Emma Johnson is an award-winning business and personal finance journalist, and creator of WealthySingleMommy, a blog devoted to helping professional single moms lead fantastic lives. She also hosts The Emma Johnson Show, syndicated nationwide on AM radio. After her divorce, she financed a Subaru Impreza wagon at favorable terms.
