Having a bad credit can stand in the way of getting a car loan, despite having a stable job history or income. Lenders are usually weary of people who have history of late payments, bankruptcy, high debt, or repossession. This is usually a sign to these lenders that you are at risk of defaulting on your auto loan, and lenders try as much as possible to avoid the cost associated with repossession of vehicle.
Despite how difficult it may appear to be, you can still secure a car loan with bad credit, the only challenge is that it would have to cost you more. You must enter the process of securing an car loan with the understanding that you will pay a higher interest rate compared to someone with a good credit score. However, you still need to be careful when shopping for a bad credit car loan so you won’t end up getting overcharged.
Know your credit score:
The first thing to do when trying to secure an auto loan is to find out your credit score. As you may already know, credit scores are a big influencer for lenders to determine the interest rate you will receive on your car loan. You should check your credit from all three major credit bureaus months before you begin your car shopping journey. Doing this months in advance will give you substantial time to get things in order and improve a potentially poor score, which will would help you get better loan rates.
Improve your score:
Not only does the credit report tell you where you fall on the credit scale, it also informs you on the areas that are hurting your credit. After knowing what your score is, the next thing to do is to try and improve your score. Some of the steps you can take include paying off debts, clearing up errors, and adding positive information to your report. A good idea may be to delay auto financing until you can improve your score. This may save you a lot of money in the long run.
Be on your best behavior:
For someone trying to get out of a bad credit, it is important that you be on your best behavior months preceding your loan application. Avoid taking on any more credit obligations, such as credit cards. Some of the red flags for lenders include late rent payments, bankruptcy, liens, etc.
Find a dealership willing to help:
There are a couple of options available to car buyers with credit score below 500. A good idea is to find a dealership that is willing to work with you. Most dealerships have at least 10 financial institutions that they have worked with that would be willing to offer loan to buyers with low credit score. DriveNation as an example has over 20 lenders, including a high-approving, in-house one, exclusive to their dealership. Giving you that much more of a chance of getting approved on your first stop.
Check the current interest rate:
It is important that you approach potential auto loan lenders with a knowledge of the current interest rate before you go ahead to apply. This helps you to know exactly what you should be expecting and might save you from paying extra. You can get the current interest rate for both good and bad credit scores online. If you have a good credit, then you qualify for a rate at or below the average. If you have bad credit, then you should expect to pay more, but try to avoid a loan rate that is more than double the average unless your options are limited.
Make a substantial down payment:
The size of the car loan you can get will be limited by your credit history and high interest rate. In order to offset the interest, fees, taxes, and give you a wider selection of vehicles from which to choose, you can make a larger down payment.
Know what you can afford:
It is not unusual for people to overestimate what they can afford so they can secure loans for a better car. It is important that you stick to what you can afford, this is simply the money left over after paying bills each month. Even if you are approved for a larger car loan, check your budget to know what you can afford and stick to it.
Working with a pre-approved loan is one of the most realistic ways to shop for a car. You can talk to your credit union, bank or dealership with in-house financing about getting an auto loan and the pre-approval process. If your bank does not approve your loan, then your salesman may be able to link you up with a lender who specializes in car buyers with poor credit.
Cut down on the extras:
By having a bad credit score you would face a higher loan payment because of the steep interest rate. The last thing you really want is to make the bill unnecessarily large. Options such as leather interior, premium speaker system, sunroof, and so on, may have to be cut out so as not to bloat your already high payment.
10. Read all the paperwork:
Unless you are a lawyer, loan documents may appear really confusing. But it is important that take your time to read properly and understand the terms stated in the paperwork as your credit and money are on the line. Ensure that whatever is on the paper matches exactly with what you and the dealer verbally agreed to. If the terms are okay with you, sign the documents before driving off.
Bad credit does limit your options on getting a vehicle, but it should never stop you from getting one. Find the right dealer willing to work with you and overcome those financial difficulties together as you drive off into the sunset.