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Need to get a car loan with bad credit? We cover all the details and ins and outs to easily navigate the process.
Evaluate Your Need
Financial struggles can often result in bad credit. That bad credit in turn can make it more difficult to turn those financial circumstances around. Steady employment often means a reliable set of wheels to get you there. It’s a bit of a chicken and egg scenario, you need the car to get to work, but you need the job to afford a car. And that’s where credit comes back into the picture. Even with poor credit history, there are lenders who will extend you a loan. The catch is, practically all such loans will carry high interest rates making your purchase more expensive overall.
The question you need to ask yourself if you have less than great credit is this: What is your need? Has your last/current car broken down? Do you need this car in the immediate future, or can you wait a few months? Because if you have the time, working to improve your credit prior to getting a loan is your best bet to improving that deal. Making payments on time and paying off debts can quickly improve your credit score.
Cash or Loan?
Another benefit of taking your time is the ability to save cash to a car purchase. Paying cash can save you years’ worth of interest payments and the added stress of a monthly car payment. Even if you can’t save enough money to make the purchase in full, making a sizeable down payment will shorten the length of your loan and reduce the total amount of interest you’ll pay.
Know Your Credit Score
If you are going to get a car loan with bad credit, you’ll need to know what your credit history is. There are three major credit bureaus Equifax, Experion, and TransUnion. It’s to these companies that lenders go when they want to know a borrower’s credit worthiness. They track borrowers’ credit history, including the number of accounts, the age of those accounts, the amounts of those debts, missed payments, collections, foreclosures, and bankruptcies.
It’s this type of information that is then complied to give you, the consumer, a credit score. One company that specializes in credit scoring is FICO (Fair Issaac Corp.). They assign a score to your credit history ranging from 300 (poor) to 850 (excellent). Anything below 500 is generally considered bad credit and it’s at this threshold where interest rates become prohibitively expensive for borrowers.
If you have bad credit, it’s important to review your credit history with each of the major credit bureaus. It’s not uncommon for there to be inaccuracies in their data like paid debts still reported as open or delinquent, accounts attributed to you that belong to someone else with the same name, etc. Make sure what’s in your credit history is accurate.
Identify What You Can Afford
If you’ve determined that you need a car now and not later, you’ll probably need to make some compromises on what you’ll settle for. Of course, buying a vehicle for work purposes, means seeking something specific, say a truck for construction work, a van for delivery, or a Prius for ride sharing. For pure transportation needs, buyers with bad credit would be wise to shop for reliable cars first and take the best deals they can find. In this case, cars that are least likely to cost you extra in repairs while you’re still making payments.
When shopping for a car, with good credit or bad, it’s important to focus on the total cost of the vehicle, not just monthly payment. Dealers and salespeople will often want you to focus on the monthly payment only to stretched those payments over 60-, 72-, or even 84-month terms, allow them to charge more for the vehicle and reap more interest in the process.
Shop Around for Both Car & Loan
This means patience will be key when shopping for a car and a loan. It’s best to start with local lenders, banks, and credit unions, and see what they’re willing to extend you for credit. Some lenders will pre-approve you for a certain loan amount, and this can give both you an idea of what you can afford and what you are likely to be approved for.
Note that an actual loan application will involve what’s called a hard pull on your credit. A hard pull does negatively affect your credit score, no matter how high or low that credit score is. For a prospective lender, these hard pulls are only good for a few weeks before they’d need to make a new one. Therefore, it’s important to wait to finalize your loan application until you’ve covered the rest of your bases in the car-buying process (like knowing what kind of vehicle you want and what’s available in your area).
Dealers, independent and franchise, will often want you to be financing with them. Since you’ve already gotten an idea of what other lenders are willing to give you for terms, it’s reasonable to consider what the dealer might offer. Larger franchise dealers may have further incentives on your vehicle if you finance through them. Conversely, Buy-Here, Pay-Here dealers, smaller dealers who lend directly to buyers, typically offer prohibitively high interest rates.
Know the Interest Rate
Aside from the total cost of the vehicle, the most important number to consider in your purchase is the interest rate or APR. This is also where bad credit rears its ugly head. Today, borrowers with good credit are getting somewhere between 3% and 5% APR on loans. Between 600 and 501, those rates rise to 10% or higher on new cars and up to 17% on used cars. At the poor credit threshold of 500 and down to 300 those numbers jump to roughly 14-15% for new cars and 20% or more for used cars (with some offers going as high as 27%!).
Not only do high interest rates add to the monthly payments you’ll be making, they add significantly to the overall amount you’ll pay on a loan. For instance, let’s say you’re buying a car for $25,000 with $5,000 down at an interest rate of 14.7%. Over the course of a 60-month loan period at that interest rate, you’d end up paying around $35,000. That’s $15,000 in interest! Therefore we recommend checking out an online car payment calculator and run the numbers yourself on any prospective offers.
Keep the Loan Term Short and Pay Extra
This is why it’s especially important if you’re getting a car loan with bad credit to keep the loan term short and make larger payments. Yes, it may be more difficult in the short term, but long term it’s much more affordable. And even with the bigger payments, we’d recommend making more than the minimum payment whenever you’re able. The faster you pay off your auto loan, the less interest you’ll pay.
For some borrowers, a major contributor to their bad/poor credit is a lack of credit history. Leaders can be hesitant to loan money to young, newly employed people, regardless of their paycheck. It’s in this case that you may also want to consider a co-signer. This would be a person with a good credit score who would be put on the loan with you and be responsible if you’re unable to make payments. Because if this, only seek out a co-signer if you’re positive you’re able to make payments (unless you like burning bridges and ruining the credit of family and friends).
Refinance as Credit Improves
One positive aspect of getting a car loan with bad credit, making payments on time will improve your credit score. This will also help when you refinance your loan later on. That’s right, you can refinance car loans just like you would a mortgage, typically as soon as one year after origination. So remember, you’re not stuck with that lousy interest rate for the life of your car loan.
Shopping Reminders
Before we wrap up, there are a few things to watch out for. Remember to ask to see any offer in writing before agreeing to anything. This will keep you safe from any verbal slight-of-hand from salespeople. Also, don’t drive off the lot with your new car until the paperwork is finalized. Don’t assume the deal is done until it’s done, lest you find a different/unexpected interest rate on the paperwork.
