Bad Credit Car Loans: What’s The Best Way To Get One?

Posted on April 6, 2021 in Loans

Although it may seem nearly impossible to get a car loan when you have bad credit, it’s not. While having a good score is definitely preferable and will make the process much easier in the long run, there are still plenty of options available for people that have poor credit. There is no minimum credit score required in order to get approved for an auto loan, meaning people with poor credit scores will just need to find the right lender or loan in order to get an offer. 

In fact, Americans with scores located under 670, categories classified as “fair” or “poor” credit, have the same average number of existing auto loans listed in their credit report as those with higher scores. The most important aspect is researching your options to find a loan that will best serve you and your needs, regardless of your credit score.

Know Your Credit Score

Before you begin shopping around for a car or a loan, you should have a strong idea of your credit score. The FICO credit scoring system ranges from 300 to 850 and you need to know exactly what a lender will see when they are evaluating your credit during the application process. Your FICO score will consist of a few categories, such as how much your total debt is, the length of your credit history, and your payment history. 

While you are checking over your credit report, look for any ways that you could potentially increase your score before submitting a loan application. Every little bit will help in terms of getting a lower interest rate and better overall deal, so no improvement is too small. 

Here are a few ways you can work to improve your scores:

  • Payment history is one of the most important aspects of your credit, so keeping as spotless of a record as you can is one of the best ways to maintain a good credit score. If you have any past due accounts that are currently in collection, pay those accounts as soon as possible.

  • Reduce your current debt as much as you can. This will not only put you in a better financial position when applying for a loan, but it will also improve your credit utilization ratio. This ratio is calculated by dividing your total revolving credit balances by your total credit limits. In other words, the amount that you owe divided by the total amount of your credit limit. Try to get this ratio under 30% if possible, but getting it to under 10% will have the best results.

  • Avoid opening any new credit cards or loans. Opening new accounts will affect your credit history and flag your report as someone that needs money. This can affect your score and make a lender wary about your ability to repay the car loan.

Know Your Limits

Whenever you buy a car, there are two highly important things you will need to consider. The first is how much you will need as a down payment, and the second is how much will the monthly cost of having this car be. Figuring out an affordable monthly payment, including loan, insurance, gas, and maintenance, is a very important step to take early in the process of buying a car. 

This will dictate how much you will be able to afford and will affect the available cars that you could purchase. Remember that the more expensive the car, the higher the down payment and monthly payment.

Save Up For The Down Payment

Whenever you buy a car, you’ll almost certainly be required to provide a down payment. This payment will go directly toward the purchase of the car, with the remaining amount being financed and paid back over time. When buying a car, the more money that you can put down, the lower the total loan amount and monthly payments will be. 

In addition, making a larger down payment will reduce your risk in the eyes of the lender, which can help you to secure a lower interest rate on your loan, saving money over the course of repayment. It’s a good idea to make a down payment around 20% of the total value of the car, if possible. 

Get A Preapproved Loan

Pre approval is a process where a loan lender will check your credit and financial details and tell you how much of a loan they are willing to offer. This will give you a better idea of what you can afford, and will take some of the stress out of worrying whether you will be able to get approved for a certain car or not. 

Once you have a preapproval letter in your hand, it will not only help you to understand what your price range for a potential vehicle will be, but it may help you to negotiate a better purchase price with the auto dealer.

Do Your Research And Shop Around

Once you begin the process of shopping around for the best loan, don’t limit yourself to just one lender. There is a variety of lenders and loan types that can all be willing to offer you a loan, including:

  • Banks or credit unions: If you already have a relationship with a bank or credit union, then you have a great place to start. Most banks and credit unions will offer discounted rates for their members. Similar to any other loan, you would simply apply with a banker and receive a preapproval that you would then take to the dealership.

  • Online lenders: There are plenty of online lenders that will offer a pre qualification tool on their website that will allow you to see if you’ll qualify for the loan before you apply, which can save you from a hard credit check.

  • Captive financing: This type of financing means that you will not only be buying a car from a dealership, but you will also finance the loan directly through them. Although not typically offered for used cars, these loans may be easier to get for someone with poor credit, as captive lenders will have the extra incentive to issue a loan so they can sell a car.

  • Dealer arranged financing: In this situation, the dealer will work with different lenders in order to find and obtain a loan for the vehicle. Once you apply, you would get several loan options from which you will simply choose the best option.

  • “Buy here, pay here” dealerships: These dealerships can be useful if you are unable to get an approved loan by a bank or lender, but they should be approached with caution. While these types of dealerships will be more likely to approve someone with bad credit, the interest rates will typically be much higher. Make sure you research the rates and conditions before applying or accepting a loan from one of these dealerships. 

Bring Someone With You

Bringing a friend or relative to the negotiating table will help to improve your confidence. However, if it’s someone that you really trust, consider asking them to be a co signer on your loan. 

A co signer will reduce a lot of the risk for lenders because this co signer would legally become responsible for the loan if you were to default on payments. Adding a co signer can be a very strong negotiating tactic that will typically result in a lower interest rate for the loan. It’s very important that you can make sure you’ll be able to make the loan payments before asking or taking on a co signer. If you were to fail making payments then the debt would fall on them to repay, which can create permanent damage to your relationship. 

The Takeaway

Before you start looking at cars, take a look at your credit score and try to make improvements if you can. You should also start saving up for as large of a down payment as you can afford, set your monthly budget for repayment, and shop around for pre approval loans. 

When you have bad credit, it will be much tougher for you to get approved for a car loan. You will often have to face less favorable terms and interest rates, along with having to face predatory lending practices. However, being prepared and researching your options will help you to find a loan with the best options. Then, once you get approved and start paying down your loan, you will help improve your credit score. After this, you may be able to refinance your loan and end up with a much more financially friendly deal.

Related: Lending For Bad Review

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