(Originally written for Wikimotive, 2019)
No one wants to have bad credit, but sometimes circumstances in life can be contributing factors. You could lose you job, or go through a divorce, or have unexpected medical expenses. Having poor credit can have an impact on many things, including loans. However, it is still possible to obtain poor credit car loans. “What do I need to get a car with bad credit?”, you may be asking yourself.
If you’ve got bad credit and are looking for an auto loan, probably the most important factor to know about is that you’ll be paying a much higher interest rate than those with decent or good credit. But try to not let that discourage you. There are loans available, but it will take some thorough research when shopping around. Let’s take a closer look at some things to be aware of when seeking a bad credit auto loan.
1. Check your credit score
The very first step is to check your credit score to determine where you stand and if the score is indeed poor. You may have gotten advice from others that this is so, but you really need to confirm it for yourself. You may think you have poor credit because you’ve made some late payments, but it’s important to know for sure and not proceed on assumptions.
The easiest way to do this is to check your score through any of the major reporting agencies. In addition to the score itself, these reports will also include factors which may be having an impact on your score and overall credit rating.
As credit scores are a determining factor for lenders, the will ultimately decide where you land as far as interest rate on a loan. It’s a good idea to check the major credit bureaus for a few months before you plan on shopping for a vehicle to help you determine any trends that may need improvement. Knowing your score beforehand can help to fix any errors that may be on he credit report and to get everything in shape in an effort to get the best interest rate possible.
2. Improve your credit score
If you do find mistakes or items that need working on in regards to your credit score, give yourself at least 30 days to dispute mistakes before setting out on the car buying journey. If you find that your score isn’t quite as bad as you feared, simple steps like paying off credit card debt, clearing up errors or resolving old collection disputes could put you up over the 700 number, which is generally considered in the good range. You may want to get the vehicle now, but having some patience and pushing it of while you improve your credit score will save you money in the long term.
3. How badly do you need that car?
Are you in a situation where you absolutely need a vehicle because you have no other way to get around, or is car a luxury item at this point? This takes a good hard look and being honest with yourself, as buying a car with bad credit can have some financial implications later on down the road.
Before shopping for a vehicle, ask yourself if there are other alternatives available in the short term, like public transportation or carpooling. If you can push off the purchase for six months or a year, this will provide time to work on improving your credit.
4. Find the right dealer who will work with you and your credit situation
If you’re dealing with poor credit but find yourself in the situation where you need to get a car now, there are a couple of options. If you want to go through an auto dealer, you’ll need to to research those who can handle that kind of loan. This shouldn’t be too difficult, as most auto dealers the days work with anywhere from 10 to 20 different lending institutions. Chances are, there’s a deal for you in there somewhere.
The other option is to try and secure a loan through a bank that has a relationship with the dealer you have in mind. Sometimes the dealer has enough pull with the bank to ask for a favor that will work to your advantage.
5. Consider getting pre-approved for a loan
For buyers in dire credit situations, getting pre-approved for a loan from a bank or credit union can better prepare them for the car buying process. Pre-approval requires looking at your income, expenses, credit score, and credit report. All this information will be analyzed by the lender to determine if you qualify for a loan and for how much.
With this information in hand, buyers will be better prepared once they visit the dealership. Much like applying for a home mortgage, getting the paperwork in order and knowing what potential obstacles you might face can save a lot of trouble later.
6. Limit your loan applications to a specific time frame
When you’re applying for a vehicle loan, each lender you contact will be checking your credit score. Unfortunately and ironically, each check of your credit report has a negative impact on your score. The good news here is that each inquiry is only counted once within a two week period. So after two weeks, the “counter” is reset. Because of how this works, it’s important to remember to apply for loans only when you are prepared to take on out. Otherwise you could be endangering your credit score further.
7. Consider a shorter loan term
Stretching out a loan for say five years will give you a lower monthly payment, but be mindful of the interest rate. Longer loans will save you money in the short term, but that savings will be offset by paying out more in interest over the life of the loan. Generally, going with a shorter loan period will provide a lower interest rate.
8. Consider a newer vehicle over an older one
While an older vehicle will certainly have a lower overall purchase price, they can also tend to charge more in interest than newer models. For anyone looking to finance a vehicle on poor credit, try looking at newer models first since these are the ones that will offer the best financing deals. If you can’t find something in this range, then slowly work your way backward toward older models. In some cases, finding the right older vehicle may mean you’ll be able to pay for it in cash, eliminating the need for financing altogether.
9. Ask a trusted person to be a co-signer
Lastly, choosing to go with a co-signer on your loan might be the best chance at getting a better interest rate. Consider this option if your debt to income ratio is high to qualify on your own or your income is variable (self employment for example).
With this approach, be sure your co-signer is a highly trusted friend or family member, as they will be responsible for making your loan payments in the event that you are unable to. You’ll need to be confident that you can make your loan payments on time and in full, or else your co-signer will be on the hook. However, provided you can make your payments, going with a co-signer is a great way to boost your credit score.
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