Dealing with bad credit? You’re not alone – many people are in the same situation you are and get approved for a car loan.
At the very least, you may think that it’s not possible with a conventional lender. However, that’s not necessarily true, and there are some options to consider before looking for alternative financing.
Poor credit scores are considered to be between 300 and 500, and that could affect your chances of getting a decent car loan. However, that doesn’t mean there’s zero chance, and it’s also best to go with those conventional lenders, whether online or with a financial institution, as you’ll typically get a better deal.
What to do if you want a car loan but still have bad credit
Here we’ll look at a step-by-step process to help you eventually get yourself a car loan.
Understand your credit score
Know where you’re standing with your credit score. You need to check it and see where you are at. Are you below the poor rating of 580 even? Then understand the factors that go into it, such as what you owe, versus how much you’re able to borrow, how old your credit history is, and what your payment history looks like.
You can also see if you miss payments or if there’s anything else negative that could affect your score.
“When you begin getting yourself a car loan, you need to assess your credit history, but hold off on applying for new credit, as that is considered a hard hit, and it’s more important to work on credit score repair.” – “Eric Smith, PNC financial analyst.
Save your money
A down payment on your car could help secure your car loan approval
“Saving each month for a down payment helps to reduce the loan amount you will need and could also lower interest rates, which can help you get the best terms with your subpar credit score.” USAA Expert – Jane Thobellem
Do your homework
Understand what you’re getting yourself into. See what common rates are with lenders who offer car loans. Be honest with yourself and see what type of monthly payment you can afford as well. You’re more than likely going to have higher rates offered, meaning smaller amounts and bigger payments.
“Consider used, but with Kelly Blue Book information’ – Autotrader finance expert Robert Broderick.
Always go shopping
With a car loan, you have multiple channels to consider.
Car dealerships. This is a good place to start, as the finance officer already takes your information and searches for the best viable option for you. You may pay higher rates, but you’ll also have some comparisons. Dealerships may also have specialized programs for those with less than stellar credit.
Online Lenders. Here you can get prequalified to take to a dealership, and it helps show your maximum loan amount with the rate and payment schedule.
Banks and Credit Unions. This can be a good place to go for your auto loans, especially if you have a positive history and relationship with these banks. They may work around your poor credit and still offer you relatively competitive terms.
Buy-here, pay-here: this should be a final option as this is typically the dealership giving you the loan directly but at a premium rate.
“With these types of loans, each lender will typically do a hard check instead of a soft credit check, meaning you want to apply within a short time period; otherwise, each check will count against your score.” – Williams LLC Financial Planner, Emily Williams.
Consider prequalification
Consider getting yourself prequalified. Again online lenders will typically do this, and it can be possible with other lenders as well. But, again, it helps speed up the overall process and gives you an advantage at the dealership.
“Getting prequalified through lenders gives you options. You can eventually submit the final documentation needed with a hard credit check to complete the application. In addition, a prequalification shows you’re about to get the loan, helping you negotiate with dealerships.” Michael Morgan, Freeman Honda Financial Advisor.
Confirm the terms
First, you seek the best terms, not the lowest monthly payment. Typically smaller payments entice you to go for those loans, but they will typically have you paying the largest amount for the loan.
“Favorable terms are always the most important thing to look out for. This is the best combination of a short repayment period combined with the lowest interest rates. It’s better to get a lower-priced car than to get an unaffordable car loan.” David Johnson, Autosearch USA credit expert.
Another area related to the terms is that you want to confirm they are the final ones. The ones you receive during prequalification and the final loan should be similar, if not the same. Any changes will result in higher payments and can happen often.
“Some in the industry may not be so honest about financing and even state that it’s not finished after the purchase is made. They may state things about needing to get a higher rate, or the car would need to be returned. Avoid at all costs.” Mohamed Daghash, Mathuro Law Offices attorney.
Be wary of unnecessary costs
You may think as someone getting a car loan with poor credit that you’ll just be thankful you’re getting the car loan and not pay attention to unnecessary add-ons or costs, states Josh Frank, who was a former researcher at the Center for Responsible Lending.
Always make sure to check everything over once more and to not agree to anything that seems out of order, such as the need to spend more money outside of the car loan to acquire it. This can be disguised as after-market services, car insurance, or even extended warranties.
“Be mindful of these additional add-ons, especially at buy here, pay here dealerships offering the loans. Even if they offer to roll these costs – your loan will only grow unnecessarily.” – Sarah Johnson, Johnson Law Firm Attorney
Have a co-signer
“It could be a relative or your best friend, but they should come with you. They’ll help you with the negotiating and to double check if everything looks good, while getting the best terms.” – Alex Rosarmin – consumer attorney Massachusetts based.
You can even ask that person to help you with the car loan by becoming a co-signer. It could be a great option if their financial situation is healthier than yours, with regular income and a high credit score.
‘’Lenders are fine with adding co-signers to the car loan as it helps reduce the risk of the loan going into default. It also helps with negotiations and better car loan terms.” – Mary Smith, Smith Associates LLC Financial Counselor.
Don’t consider lenders who readily accept subprime credit
You may feel that these are your best option since they’re specifically targeted to your financial demographic. Yet, at the same time, the rates will be way past the industry standard, and it may end up putting too much strain on your financials. It could easily accumulate to thousands more paid out in interest alone.
“Only use subprime lenders as a last resort.” – Peter Thompson, a financial coach from Thompson LLC.
In the end
Getting a car loan with bad credit attached to it is going to be tougher than first expected. You’ll have worse options than those with better credit, and you may find yourself with credit options that are just not friendly at all.
Regardless, with a bit of research, it doesn’t mean there aren’t any car loan options for you. Just focus on growing that down payment and working on getting pre-approved. Or better yet, take some time to fix up and repair your credit to get better car loan terms.
If you do find yourself with a fresh car loan, don’t let it affect your credit poorly and use this as a vehicle to pay on time and work on restoring your credit history. Eventually, you’ll be able to refinance for better, more competitive rates.
