The short answer Is yes, you can get an auto loan with bad credit. It’s not always easy but it’s not impossible. Many factors can contribute to someone having bad credit which doesn’t always equate to not being able to repay debts. Sometimes the amount of debt is just too high or the debt to credit line age isn’t desirable. Other times bad credit is the result of a divorce or student loan debt. That’s why there are auto loan finance companies that specialize in bad credit loans. Sometimes some stipulations and requirements must be met, in order to obtain the auto loan. You have to keep in mind that financing companies have to protect their investment, which is the loan and the vehicle. That’s why there are so many fine details attached to the application and loan approval. Having a car is very necessary for many people. Their credit score doesn’t have to preclude them from being able to purchase a reliable vehicle. It allows them to get from one point to another with greater convenience than public transportation or a ride-sharing service. Keep reading to learn more on how you can get an auto loan with bad credit.
1. Know Your Credit Score
Before trying to get an auto loan bad credit, you need to know your credit score. Getting a copy of your credit score from all three major credit bureaus will prepare you for the reality of trying to get an auto loan approval. When you know what lenders are looking at, you can have more realistic expectations when you walk into a dealership. Any FICO score below 580 is considered bad credit, and scores range from 300 to 850. Your credit score will depend on how much you owe, the timeliness of your payments, the ages of your credit lines, and your ratio of debt to credit. One way to ensure that your credit score does not fall any lower is to not apply for any new lines of credit or loans before applying for an auto loan. You can also work with a credit repair agency to show that you are concerned with your credit score and that you are actively working towards being a better or less risky borrower.
2. Have a Down Payment
It is a good idea to save up a down payment for the car you would like to purchase. Experts recommend a minimum down payment that’s 20% of the purchase price for more optimal results. This will not only reduce the amount you owe on the vehicle and help you obtain a lower monthly payment, but also increase your chances of getting your loan application approved. Another bonus to offering a down payment is securing better loan terms, lowering the loan-to-value ratio, and offsetting the inevitably higher interest rates the lender will require.
3. Do Your Research
Do some research beforehand so you will be prepared for any negotiations. Interest rates are typically lower for new vehicles than for used vehicles. Check with Experian to discover what the average annual percentage rate is before applying for an auto loan so you know what to expect and so you can attempt to negotiate for the lowest interest rate within the range. You should also know the asking price of the vehicle you want to buy. And if you’re not sure what you want, take a look around and then go back to the dealership once you’ve gathered your intel and gotten your plan of action together.
4. Shop Around
You don’t have to use the lender the dealership offers you. You can do some comparison shopping and shop around for the best loan terms. Some of your options for lenders include banks and credit unions, online lenders, and dealership lenders. If you already have a good relationship with a bank or credit union, they’re often the best place to start. They tend to favor their customers who have a well-established banking history. Online lenders are a good option because they often will prequalify borrowers, which means you can have an idea of what your loan terms will be beforehand. Another advantage to online lenders is that some of them will consider employment history when assessing your loan application.
5. Prequalify
Prequalifying for an auto loan shows you your eligibility before you apply, allowing you to see your potential loan terms. This helps save time and can even lock in an interest rate you’re comfortable with (unless you find something better). You’ll also be able to avoid hard credit checks that can further decrease your credit score. Once you’ve gotten a few prequalifications, you can compare the interest rates and loan terms. Another big advantage to getting prequalified and subsequently preapproved for an auto loan is being able to negotiate with the dealership like a cash buyer. The drawback is that once you’ve prequalified, you’ll need to move quickly. They typically lock in the interest rate for two weeks or less.
6. Shop Loan Terms
Everyone wants an affordable monthly payment, but what most people don’t realize is that great monthly payments don’t always equate to great loan terms. Although the monthly payment makes you happy, you don’t want to end up spending more on the vehicle due to interest rates and other unfavorable loan terms. Good loan terms are usually a low APR and a short payment schedule.
7. Get a Co-Signer
Adding a co-signer reduces the lenders’ risk. If you opt for a co-signer, they should have a steady job, a strong credit score, and a great credit history. A co-signer can result in a lower interest rate, but their credit score may suffer if the loan becomes delinquent. This can also create a strain on the personal relationship.
8. Read the Fine Print
Nonessential goods and services are often tacked onto subprime loans, so you want to go over your loan agreement with a fine-toothed comb to make sure that you’re not paying for any extras that you don’t want. Agreeing to a loan that hinges on whether or not you purchase add-ons like extended warranties or car insurance isn’t a good idea. Adding these costs to your loan can result in you being upside down on your car loan.
Once you’ve got what you’re after in terms of your auto loan, make sure the dealership finalizes it at the terms you’ve agreed upon. Conditional approval is not what you’re after. The last thing you want is to discover that the loan wasn’t finalized and that the terms have changed and are no longer to your liking.