Auto Loans

How To Get A Car Loan With Bad Credit

Need to buy a ride but don't think your credit score is up to par? All hope is not lost; you still have some options! Let's explore ways to find that perfect vehicle even with a not-so-great credit score.

How Long Can You Wait

Before jumping into a new car purchase, consider this: Do you have enough time to work on building credit score? If buying a car is more of a "want to" than a "need to", focusing on your credit score can open up your financing options, offer shorter loan terms, and result in better rates, making the overall car-buying process more enjoyable. Ideally, this is the best approach - but not every situation is so straightforward.

Things That Impact Your Score

Inaccurate Credit Report

It's always a good idea take a deep dive into your credit history to be sure your score is completely accurate. Sometimes things can be incorrectly reported or not included in your score, and even 1 point can make a difference. Be sure to contact your credit bureaus if you see a mistake and clean up your credit report!
Late Payments

Whether it's your credit card bill or a loan, always try to make your payments on or before the due date. Even making a payment one day after it's due can negatively impact your score.
Using Up A High Proportion Of Your Monthly Credit

Believe it or not, using less credit can actually boost your credit score. For instance, if you have a $1,000 credit limit, maxing it out can harm your score. But if you keep your usage to 30% or less—like $300—your score will improve.
Applying For Other Loans Or New Credit Cards
If you recently applied for a loan or credit card, you may see a dip in your score. When a lender checks your credit score through a hard inquiry, which is a request by the lender to pull your complete credit report to make a decision about your application, it will be marked on your credit history and can reduce your score by about 3-10 points. This happens because applying to multiple lenders in a short period of time is viewed by many institutions as a red flag. It's best to allow some time to recover your points before applying again.

DIG DEEPER: How To Improve Your Credit Score

Let's Talk Money

Even if you're short on time or resources to boost your credit, there are still ways to buy a car without breaking the bank. Remember, low credit scores often lead to higher interest rates and extra fees, so here are some tips to help you stay within budget.

Save For A Down Payment
Putting more money down initially means you'll save more over time. Try to aim for a 20% down payment on new cars and 10% on used ones. Contribute as much as you can without emptying your savings. This strategy will reduce your rates and monthly payments, easing financial stress and boosting your chances of getting loan approval.
Shop Loan Terms
Lower monthly payments look good on paper, but often result in longer loan terms, increasing your overall car cost. Remember, car loans with poor credit have higher interest rates and fees. Double-digit rates and an extended term mean you may pay thousands more in interest than the car is worth by the end of the loan. When shopping, look for the most favorable terms–usually the lowest APR over the shortest period. Above all else, make sure the monthly payment works for your budget!
Get Pre-Qualified
It's wise to explore and compare possible lenders for the best deal. Some might approve you, others may turn you down, and others may offer high rates. This is where pre-qualification really helps. Most lenders provide this option, a soft credit inquiry that won't affect your score, to see if you qualify. If you have a good relationship with a bank or credit union, start there for favorable loan terms. If you're having trouble securing a loan, you can try financing through a dealership, although rates may be high. Alternatively, some states have second-chance auto lenders for those with low income, which is a very good option to explore if necessary.

DIG DEEPER: Why Getting Pre-Approved For An Auto Loan Is Best

Consider A Cosigner

It's perfectly okay to ask for help when you need it. You might want to think about asking a trusted friend or family member to cosign. A cosigner can make lenders more comfortable because they're also responsible for the loan. If they have a good credit score, this could lead to a lower rate, but remember, their score might drop if the loan goes unpaid. Make sure you both agree and understand what happens if the auto loan isn't paid on time.

Go For Affordability

Leave the fancy bells and whistles! If a lender offers you unnecessary extra features such as upholstery protection, stick with the basics.

Be sure to choose a loan term that suits you. A long-term loan with smaller monthly payments may seem like a good idea on the surface, but the longer the loan lasts, the more interest you will accrue on your balance. Adversely, don't go for the shorter term if you won't be able to afford the higher payments. Be sure whatever you decide on is within your budget, and remember that making consistent payments will improve your score!