Guide to Buying a Car with Bad Credit

Guide to Buying a Car with Bad Credit

You and I both know how stressful and inconvenient it can be to get around town without your own car. In an ideal situation, you would have full access to your current vehicle until you are financially prepared to make an upgrade. However, you may be in a situation where you need to buy a new car soon with a bad credit score.

Your credit score directly impacts the interest rate, loan amount and loan term that you may qualify for when you apply for a car loan. In some cases, an applicant’s credit scores are so low that he or she is not able to qualify for any loan. In other instances, the unattractive terms from a bad credit loan may result in a high monthly payment. Regardless of whether you have already been turned down for automotive financing or you assume that you have bad credit because of a few recent issues, you should proceed slowly by walking through these essential steps.

Review Your Credit Report

Whether you are applying for a personal loan, an auto loan or other types of financing, do not take someone else’s word for it. You are entitled to a free copy of your credit report annually from the three primary credit bureaus.

When you review your own credit report, you can verify that your scores are low and see why this is the case. Whether your scores are low because you are overextended, have numerous late payments or have other correctable issues, you can easily develop a strategy to improve your scores when you understand what the actual problem is. In some cases, people find out that their credit report contains errors or that they have been a victim of fraud. Addressing these issues immediately can help you to avoid unnecessary financial loss and prevent more damage from being done. Keep in mind that auto lenders have unique credit score requirements. If you know what your credit scores are, you can narrow down your search to programs that you qualify for.

Attempt to Improve Your Credit Rating

Credit Score

While there are credit repair agencies that offer quick-fix promises, you can reasonably expect to improve your credit rating slowly over the course of several months and with strategic effort. If you are willing to delay the purchase of your next car, this may be a smart path to follow.

A common way to address late payments and high debt balances is with a consolidation loan. Simply apply for a personal loan with a low-interest rate, and roll your existing balances into that account for faster debt reduction and easier financial management. If your credit score issue stems from late payments, improving financial management and reducing debt balances with timely payments is helpful. You may also need to scale back spending so that you can afford to make your payments on time. Setting up automatic payments is also an effective solution for many people. For more pronounced results or to address more significant situations, consider utilizing professional debt management services offered by reputable providers.

Look for a Bad Credit Lender

If you need a new car immediately and cannot realistically spend several months trying to improve your credit scores, a bad credit lender may help you. Each lender has unique applicant requirements, so a denial from one lender should not prevent you from applying with another auto lender.

In fact, some lenders specialize in providing financing to individuals with low credit scores. When you apply for a bad credit loan, set reasonable expectations for the interest rate, down payment requirement and monthly payment. Generally, auto loan rates depend on a combination of the applicant’s credit score and the down payment amount. By putting down more money upfront, you may qualify for a slightly better interest rate. Nonetheless, your monthly payment may still be considerably higher with bad credit financing. In addition to applying with a specialized bad credit lender, you may apply for a new loan with a bank that you already have an established relationship with.

Get a Pre-Approval Letter

You will be in a better negotiating position with a dealership’s financing department if you bring a pre-approval letter with you to the dealership. By doing so, you are essentially telling the dealership that they must beat that offer.

A pre-approval letter is a proof that you qualify for a car loan with that specific lender. Lenders often review your credit scores, income, expenses and other factors before issuing this letter, so the terms offered via the letter are firm. A dealership may not always be able to beat the financing offer that you located on your own. If this is the case, simply move forward with your vehicle purchase using the financing that you have already located. Getting a pre-approval letter upfront may also give you the confidence to negotiate a better deal on your preferred vehicle, which could result in lower monthly loan payments.

Other Factors to Consider Before Applying for a Bad Credit Loan

Committing to any type of bad credit financing should only be done after you have explored all alternatives and understand the full ramifications. These primary factors may influence your budget and options going forward. With a higher interest rate, you may pay the loan balance off at a slower rate during the first few years of ownership. This could place you in a position of being upside down with your car, which could essentially trap you into a loan and a vehicle for longer than you desire. Some personal loans and auto loans have a prepayment penalty, which could also make it more expensive to get out of the loan as soon as you may like to. Some bad credit financing options have a caveat that enables you to qualify for a lower rate without refinancing, so you should research this possibility and understand the requirements. You likely will use your new financing to re-establish a great credit score, but not all lenders report to all three credit bureaus. Before finalizing your financing plans, ensure that your preferred lender will report your payment history as desired.

Other Ways to Save Money on Financing with Bad Credit Scores

Lower credit scores often increase the cost of financing, but this may also present you with the opportunity to rebuild your credit rating. In the meantime, you can follow a few strategies to qualify for the most competitive financing option available.

    • Opt for the shortest term period available. Shorter-Term results in higher loan payments, so ensure that you can afford the monthly payment before making a commitment.
    • Think about buying a new car. Your inclination may be to buy a used car to keep the cost as low as possible, but new car financing generally has lower interest rates.
    • Shop around extensively. This includes looking for loans on your own through banks and credit unions, and it also includes comparing offers from different dealerships.
    • Skip dealership specials. Many dealerships try to tack on expensive add-ons at the last minute, such as for services like VIN etching or paint protection. Pass on these as they can result in a higher monthly payment.
    • Pay your loan off as soon as possible. Each month, you will pay more interest on your loan, so making a few extra payments can result in huge savings over the life of the loan.

You and I both know how stressful and disheartening it can be to receival a denial from a lender, but this does not mean that all hope is lost. Drivers have access to many loan programs from numerous lenders, and they also may take numerous steps to save money on any financing program they decide to move forward with. Have you done everything you can to find the best deal on a bad credit auto loan?

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