Financing a car with bad credit is challenging but not impossible
If you are going to buy a new or used car, you might need to take out a loan, which is easy peasy if you have a credit score of 670 or higher. However, the big question is how to finance a car with a bad credit score. But let us tell you that even with lower credit scores, you can secure a car loan if you follow the below steps.
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How to finance a car with a bad credit score?
Having a bad credit score doesn’t mean that you will never be able to buy a new car. You just need to be more perseverant to secure a loan. So, let us guide you on how you can finance a car with a bad credit score:
1. Credit Score Can Be Improved
The most obvious step to meet your aspiration of buying a new car would be to improve your credit score. You can take a few steps to do that:
Pay your bills when due:
35% of your credit score comes from your payment history, so maintaining a good payments track record is a sure-shot booster to your credit score
Minimize credit utilization:
30% of your credit score comes from how much loan you already have on your credit card limit. The lesser you utilize your limit, the higher the chances of having a higher credit score. So, if you are using the limit too recklessly, you should stop that.
Secure a higher credit card limit:
Suppose you are not being reckless with your credit card limit utilization and are only spending on necessary items, you can apply for a limit increase so that, in percentage terms, your utilization reduces. However, this is only possible if your issuer approves the limit extension.
Get credit report errors rectified:
You should periodically review your credit report and dispute any fraudulent transactions on it. Also, at times even if you pay your dues timely, there might be a reporting lag, so you should proactively get it fixed to secure a higher credit score.
If all goes well, your credit score can spike in just 30 days of taking these steps.
2. Save Enough for the Down Payment
If you wish to finance a car with bad credit score, you must be forewarned that you might not be able to secure the loan for your entire value. So, saving up for the upfront payment you need to make while purchasing the car is better. Generally, it amounts to 20% of the total price, which you can save up by setting aside some amount every month.
If you can afford it, you can even make a higher down payment, so your future payments and interest thereon are lower. Not only will the lower payments be less taxing on you, but the lenders will also have greater faith in you and give you more favorable terms for the loaned amount.
3. Go for an Affordable Car
If you wish to finance a car with bad credit, you should go for an affordable car. This doesn’t mean you have to take a car with a leaking fuel tank or dents on the doors. All it means is that you should not get swayed by auto dealers trying to upsell you with spacious SUVs and the latest features. You only need a car that gets you around; you don’t need a vehicle for which you can’t pay later and dent your credit score even further.
4. Get Loan Preapproval
It’s possible that you overestimate your affordability and end up with a car that you can’t pay for. Therefore, it is better to seek professional help in the form of a loan preapproval. A loan preapproval means that your lender assesses your finances and informs you about the amount of loan you can afford. Staying within this limit is a good indicator of how much of a loan you can afford.
You can even use the preapproval letter to negotiate better prices or prove to the car dealer that you are capable of paying off even if you have had a bad credit score till now.
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5. Know Your Loan Options
Just like you research car models you wish to buy, you should also research car loan options and lenders before you finance a car. You’ll be surprised to know that car loan rates and terms vary greatly from lender to lender.
If you go to a car dealership, you are definitely going to get a higher interest rate because they get a commission from the actual lenders on the financing they secure. This can be as high as 4%, which also means that securing a loan directly from the lender could be 4% cheaper. Being aware helps a lot when securing the best terms.
Some alternative lenders include:
- Credit unions: These are nonprofit organizations, so they offer the lowest possible interest rates with more favorable terms and loan schedules.
- Banks: You can contact your local banker who knows your track record to offer you better loan terms.
- Online lenders: Due to the stiff competition they face from banks, online lenders offer car loans at better terms to borrowers with lower credit scores. They bear the risk in an attempt to carve their market share.
- Captive Financing: If you are thinking of buying a new car, you might seek the manufacturer’s help for financing. In this case, as the financier is the same as the car manufacturer, he has an incentive to offer you better terms and can be forgiving because you also help him boost his sales.
Lastly, if you are unable to finance a car with bad credit from any of these alternative lenders, you have to resort to BHPH dealers. BHPH stands for”buy here, pay here,” or the dealer from where you buy your car. But be prepared that your interest rate will be higher.
6. Find a Cosigner
A Cosigner is a loan guarantor. You can ask a friend, family member, or relative to “vouch for” you. Your cosigner should have a better credit score than you do; it helps you secure a loan even with a lower credit score.
Also, some dealers limit the car selection for people with lower credit scores. Having a cosigner can help you choose from a wider selection and prevent you from buying a vehicle that will not last long enough.
However, your cosigner’s credit score is at stake if you default, so use this option carefully and only take out a loan you are reasonably sure to pay off on time.
What to do after you have secured a car loan?
While securing a car loan with bad credit was a big achievement, you shouldn’t become oblivious to all that goes around in the loan world after that. Even if your initial terms were less than favorable, things change. So, after you’ve got a loan, keep an eye out for the below possibilities:
- Refinance your loan: As the economy changes, interest rates vary, so if you get to know that interest rates are falling, check your loan documents for a repayment option. Repay the current loan if you can secure a new loan with a lower interest rate.
- Take advantage of an improved credit score: As you continue to make car payments and progress in life, your credit score can improve over time. So get your credit score evaluated from time to time and figure out if you can secure better loan terms with an improved credit score.
The bottom line of financing a car with bad credit
If you want to finance a car with bad credit, you will have to research more, but in the end, you can secure favorable terms. Although it is advisable to postpone the purchase until you can improve your credit score, if you urgently need the vehicle, you can secure a loan by following one or more steps suggested above. Also, keeping an eye on the interest rate environment is always recommended even after you have secured a loan to refinance it when you can secure better terms.
