How to get a car loan with bad credit

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If you have bad credit, getting a car loan can be difficult, but it’s not impossible. The most important aspect of obtaining a bad credit auto loan is to research the options that will allow you to find the loan that will serve you best, regardless of your credit rating.

Here are 10 things you should know before you start the process of applying for a bad credit auto loan.

1. Know your credit score

Before you begin the buying process, check your credit score. According to FICO Credit Rating System, which ranges from 300 to 850, any score less than or equal to 580 is considered poor.

Your FICO score consists of a few categories, such as how much you owe, how long your credit history is, and your payment history. Not making your payments on time, consistently spending more than your available monthly credit, and having a short credit history can all negatively impact your credit score.

There may be factors that you can address immediately, like making payments on overdue accounts. Before applying for an auto loan, you should also avoid opening new credit cards or new loans. Taking steps to repair your credit score before you start shopping can put you in a better position with lenders.

2. Save for a down payment

If your credit score is lower, a down payment on a car can increase your chances of getting and getting approved for an auto loan.

Setting aside a little extra money each month for a down payment can also offset higher interest rates caused by a less than stellar credit rating and can lower your loan-to-value ratio, helping you get better terms. .

3. Research, research, research

Prepare as much as possible so that you are not caught off guard when the time comes to negotiate. Before applying for a loan, know exactly how much monthly payment you can afford and what APRs are common with auto lenders. With a bad credit rating, you will likely be offered some of the highest advertised rates.

If you are buying used, it is also useful to know the Kelley Blue Book Value of your favorite car.

4. Shop

Once you start the purchasing process, don’t limit yourself to just one lender. There are a variety of lenders who can help you get a loan, including:

  • Banks / Credit Unions: If you already have a relationship with your bank or credit union, start here. Some banks and credit unions offer reduced rates to members.
  • Online lenders: Many online lenders offer a prequalification tool on their websites that lets you see if you qualify for the loan before you apply, which can save you from a rigorous credit check if you don’t meet the conditions.
  • Car dealers: You can finance your car from a dealership if you meet the financial and credit criteria. You will meet with a financial service representative and they will send your information to different lenders to offer you a competitive rate. Some dealerships may also offer programs to borrowers with bad credit history.
  • Dealers bought here and paid: Dealers bought here and paid can be useful if you are not getting approval from a bank or lender for a loan, but they should be approached with caution. While these types of dealers are more likely to approve someone with bad credit for a loan, the interest rates can be much higher. Be sure to research the rates and terms before applying for a loan with any of these lots.

Even two applicants with the same credit score may not be the same in the eyes of a lender, says John Van Alst, an attorney at the National Consumer Law Center. “Even if your score is tarnished, you may have a better chance than someone with the same score and no (credit) history.”

Don’t lag – lenders perform a rigorous credit check during the application process. Strict credit checks signal to the credit bureaus that a borrower is about to take on more debt and can cause your credit score to drop. Stretch the process too long and it might become more difficult to negotiate favorable terms.

To be sure, we recommend that you visit or consider three different lenders over a 14 day period.

5. Pre-qualification with lenders

Prequalification allows you to see if you qualify for a loan before you apply. Thanks to prequalification, you will save time in applications and avoid unnecessary credit checks. Several rigorous credit checks negatively impact your credit score, and if you already have less than desirable credit, it’s always worth pre-qualifying with a few lenders to compare the rates and terms you qualify for. .

6. Make sure the terms are final

If you are financing through a dealer, always make sure the terms are final before signing. If you don’t, you could face higher monthly payments or an increased down payment in the future.

It’s called a “yo-yo scam”: dealerships tell car buyers that their financing is not complete and that they have to accept a higher interest rate.

7. Avoid subprime lenders

Subprime lenders can seem like a safe bet for anyone wondering how to get a car loan with bad credit. These lenders typically cater to customers with lower credit scores and can make the car buying process easy and stress-free – early on.

Subprime auto loans can carry extremely high interest rates and are unlikely to help improve your credit score.

Always do your research in advance and only consider subprime lenders if you are unable to find another financing option.

8. Loan conditions in store, no monthly payments

The lower monthly payments look good on paper and are typically used to attract buyers. In reality, they can cause you to pay more for your car over the life of the loan because they will come with longer terms. Because bad credit auto loans have higher APRs, you may end up paying more than the full value of the car at the end of the loan due to the accumulation of interest.

When shopping, look for the most favorable terms – usually the lowest APR over the shortest time frame. This way, you will have more manageable monthly payments with reasonable interest rates. If you are unable to find a low APR, you may want to consider purchasing a different vehicle.

9. Bring a friend with you – and think of a co-signer

Ask a friend or family member to come with you, says Yvonne Rosmarin, a Massachusetts-based consumer protection lawyer. Bringing someone you trust to the negotiating table can help build trust. And trust, combined with know-how, can lead to better loan terms.

If this is someone you really trust, consider asking them to co-sign. Co-signers reduce much of the risk for lenders – they will become responsible for the loan in the event of default. Adding a co-signer can be a powerful negotiating tool and usually results in a lower interest rate.

Make sure you can make payments before hiring a co-signer. If you don’t make payments and the debt is on them, it can permanently damage your personal relationship.

10. Check for add-ons and scams

Nonprime buyers are more likely to encounter loan contracts with non-essential goods and services, says Josh Frank, former principal researcher at the Center for Responsible Lending. Other costs, such as auto insurance rates, can accumulate for non-premium buyers.

Never let the loan depend on the purchase of an add-on, such as extended warranties, after-sales services and even car insurance. Be aware of these add-ons, especially if you need to apply from a dealership to buy here, pay here, or if you plan to trade in your vehicle.

Bad credit doesn’t have to mean bad terms

Unfortunately, if you have bad credit, it can be more difficult for you to get a car loan. You may be faced with less favorable terms or even predatory lending practices.

The good news is that coming to the negotiating table with preparation and research can help you find a loan with a much lower rate. First, find the loan that’s right for you and pay it off to improve your credit score. At this point, consider refinancing; you might find a loan with even better terms.

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