Can you achieve the dream of buying a car with credit that’s more like a nightmare? The answer is usually yes, though you'll have to do some extra work. Your car loan will likely be significantly more expensive than it would be for shoppers with higher credit scores.
Auto lending is an industry built on trust. Lenders generally trust borrowers with excellent credit to pay back their loans on time. They don't have as much confidence in borrowers with bad credit, so they price the additional risk into loans by charging significantly higher interest rates. Borrowers with poor credit will also find loan terms that are more restrictive than those for buyers with prime credit or above.
If you have bad credit, “you’re probably not going to get the lowest rate possible,” says Joe Pendergast, Navy Federal Credit Union’s vice president of consumer lending.
Buying a car when you have bad credit can be a path to a better credit score. Make mistakes, however, and purchasing a new or used vehicle can be devastating to your financial future. Following the steps below will help to ensure you’re one of the buyers who successfully navigates the car financing, purchasing, and ownership journey.
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1) Find Out How Bad Your Credit Is
Before you start planning for a car purchase, it’s essential you know where you stand. In addition to knowing your budget and what features you need in a car, you’ll also want to know your credit score. Knowing where your credit score will help you make an informed decision about what you can buy and how much it will cost.
What Is a Credit Score?
A credit score is a number between 300 and 850 that represents the credit history information in your credit report. Most consumers have credit histories at each of the three major credit reporting bureaus – Experian, Equifax, and TransUnion. To a lender, it represents your creditworthiness, which is the likelihood you will pay back any money you borrow. A credit score reflects your history of on-time payments, the amount of credit you have available to you, the amount of credit you are using, the number of inquiries about your credit from potential lenders, the age of your credit, and any derogatory information.
Though it’s sometimes called a FICO score, the FICO scoring model is just one type of score credit bureaus create to predict your creditworthiness. Most consumers have several credit scores, though the different scoring models are generally close enough to one another that consumers shouldn’t worry about the differences.
It’s currently a snapshot that shows the information from a single point in time. That’s likely to change in the future, as credit bureaus begin to look at trends within your credit history to develop a more precise picture of your ability to handle credit.
What Is a Bad Credit Score?
Different lenders and credit reporting bureaus use different ranges to describe credit tiers. The FICO model uses the following classifications: A Poor credit score is 300 to 579, while the Fair category encompasses the range from 580 to 669. Consumers with ratings from 670 to 739 are considered to haveGood credit, and those with scores from 740 to 799 are considered Very Good. Those with scores from 800 to 850 are deemed Exceptional.
Some scoring models use a range of 250 to 900, but the 300 to 850-point range is more common.
Whether an individual borrower has good, bad, or excellent credit is up to each lender. The FICO credit score model considers any score below 670 to be considered bad credit. The terms subprime and deep subprime are also used to describe credit scores on the lower end of the scale. Prime and super prime borrowers have scores at the top of the range.
Why Does it Matter?
Potential lenders use credit scores to not only determine whether to approve or decline your auto loan application, but also to set the terms of the loan. Those terms include the amount they will lend to you, the interest rate charged, what down payment they will require, and the length of the loan they will offer. While the average length of auto loans is climbing, borrowers with lousy credit should not expect to qualify for the longest lengths.
According to Experian’s numbers from the third quarter of 2019, a super prime new car buyer could expect to pay an average interest rate of 4.01% on their loan. A subprime borrower paid 11.71% for the same loan, while a deep subprime buyer would have paid 14.30%. The average interest rate charged to deep subprime used car buyers was 19.72%. That’s more than four times as high as the 4.66% average super prime borrowers paid on used car loans.
Looking at interest rates is one thing, but let’s look at some more concrete costs. We’ll use an auto loan calculator to show us how much interest would be paid over the life of different loans. For this example, we’ll look at a $20,000 used car with a 10%, or $2,000, down payment and a five-year loan. First, we’ll subtract the down payment from the car price to see that the loan will be $18,000. Then, we’ll plug the loan size, loan length, and interest rate into our car loan calculator.
The super prime buyer would have monthly payments of $337 and would pay a total of $2,213 over the term of the loan. A deep subprime borrower, on the other hand, would have $474 monthly payments and would pay a total of $10,445 in interest on the loan. A subprime borrower paying the tier's 16.89% average rate would have payments of $446 and spend a total of $8,777 in interest over the life of the loan.
In the above example, you can see that a deep subprime buyer would have to pay over $8,000 more in interest than a borrower with excellent credit. A subprime buyer would pay more than $6,500 in extra interest.
Why can banks and other lenders charge consumers whose credit is already on the rocks such high interest rates? It might not seem fair, but lenders can show borrowers with low credit scores are riskier to lend money to. Many more default on their loans than those with higher scores. Lenders price that additional risk into the price of the loan in the form of higher interest rates.
Where Can You Find Your Credit Score?
Well before you get in the market for a car, you want to check your credit score. Many credit card companies provide scores as a benefit of having the card. If yours does not, there are many online sources such as CreditKarma.com. They will give you a peek at your score in exchange for you providing some personal information. They’ll use your information to send you customized sales pitches.
Be wary of any sources of credit information that require a fee or a subscription to a credit monitoring service before they provide your score. Since you have to provide a host of personal data, it's essential to stay with well-known companies for credit information. If you have any doubts as to a company's authenticity, don't give them any of your personal information.
Most companies that provide credit scores don’t give you free access to the credit reports behind them, though getting them is easy.
Where Can You See Your Credit Reports?
When you see problems with your credit scores, you must look at the credit reports that drive your score to identify where the issues lie. They may be something as simple as reporting errors, or as troublesome as multiple late payments.
By law, you’re entitled to a copy of your report from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion – each year. The only place that is authorized to provide them is AnnualCreditReport.com. If you need to see your reports more frequently, you’ll likely have to pay to do so. Many sites with similar names have cropped up, but most of them will try to sell you products or scam you out of personal information.
If you have been denied credit, the lender is required to tell you the reason you were not approved. They must also provide a copy of the credit report used to support the decision.
How to Improve Your Credit Score
To know the best way to improve your credit score, it’s important to know the factors that are considered. Though different credit scoring models use different weights, those used for the FICO model are typical.
Payment History (35%): Your payment history is a measure of whether you pay your bills on time, whether you’ve had a bankruptcy, and any other collection actions lenders have had to take against you. It typically only includes credit cards and other loans, such as mortgages and finance company accounts.
How much negative items weigh on your score depends on how long ago they occurred, how large they were, how often they occurred, and how many issues there were.
How to improve your score in this category: The easiest way to improve your score is by making your payments on time every month. For some, it can be as easy as setting up automatic payments so you don't forget to pay your bills. Others may have to make some lifestyle changes and sacrifice other spending so you can fit your existing obligations into your monthly budget.
It takes time for improvements in this area to be reflected in your credit score. If you’re very weak in this area, you might consider putting off your car purchase for several months, while you get your financial house in order.
Amounts Owed (30%): Several factors go into determining how this component fits into your credit score. Not only do credit bureaus look at how much you owe, but they also look at the total amount of credit you have available. Finally, they look at how much you owe compared to the total you have available. In general, they don't want to see consumers maxed out to their credit limits on their cards or holding a large number of credit cards with balances.
How to improve your score in this area: The best way to improve your credit score in this area is to reduce the balance of your credit cards and other debts. Paying just the minimum on your credit cards does little to reduce your balance, so paying extra whenever possible is a better route. To make the most significant dent, start by paying down the principal balance of the card you have with the highest interest rate. Once that's paid off, move to the card with the next-highest interest rate, and so on. Do this until all of your cards are paid off.
What you don’t want to do is pay off a credit card and immediately close the account. Doing so reduces the total amount of credit you’re being offered, and can significantly raise your percentage of credit utilization. Even though you paid off an account, your percentage of credit utilization could climb higher. When that happens, your credit score will drop.
Age of Accounts (15%): Your credit score reflects how long your accounts have been open. The longer an account has been open and active, the more positive effect it has on your score. A new account will bring your score down a few points. Several new accounts may signal credit bureaus that you’re in financial distress, and that may drop your score substantially.
How to improve your score in this area: In the time before you buy a car, keep your credit as stable as possible. Don’t open new accounts or close old ones. Be sure to use your older accounts, so they’re seen as active.
Newly Extended Credit (10%): When credit bureaus see you attempt to open several new accounts in a short period, it sends up a red flag that you might be struggling financially. They will drop your score when they observe such behavior.
How to improve your score in this area: When you’re getting ready to buy a car, don’t apply for credit cards or any other type of debt. Doing so might lower your score enough to disqualify you from getting a loan. You may also be overcharged with a higher interest rate than you should pre-qualify to receive.
Mix of Credit (10%): Credit bureaus like to see a mix of credit sources, including credit cards, mortgages, installment accounts, and others. Many consumers don’t have multiple types of loans, so it’s good that this component doesn’t carry much weight in your score.
How to improve your score in this area: Don't stress your credit mix too much, and definitely don't seek out new types of credit just to enhance your mix. In general, your mix of credit improves as you get older, buy a house, and apply for different types of financing.
What’s Not in Your Credit Report?
Many things are not reflected in your credit score. Demographic information, such as your race, marital status, sex, national origin, and religion cannot be considered, per federal law. The score does not consider your location, the terms of any existing loans, whether you pay child support, or if you are receiving credit counseling. Some models consider your age, while others do not.
Your credit score is entirely based on information in your credit report. If it’s not in the report, it has no bearing on your score.
Your score does not show whether you have a job, what your occupation is, your employment history, or your level of income. Lenders, however, will gather that information from your loan application and may use it when they evaluate whether to give you a loan or not.
Your Creditworthiness Isn’t All About Your Score
When you want a car loan, you have to fill out a loan application for the lender. They will ask about your employment, assets, the type of car you're planning to buy, and more. They will consider those factors along with your credit score to come up with an approval or rejection.
One of the greatest factors they will consider is your debt to income ratio. It’s the total of your obligations compared to the income available to service the debt. When it’s too high, you’ll likely be declined or face restrictive car loan terms.
As long as the inclusion of a piece of information is not restricted by law, a lender can consider it when making an auto loan decision.
2) Find a Car That Fits Your Needs and Budget
When you have bad credit, you may have to reset your car-buying expectations. Your goal should be to find a vehicle that’s aligned with your needs but won’t bust your budget. You’re already in a financial hole, and you don’t want to dig it any deeper. While you can probably find a dealer that will craft a financing package to buy a car you really can’t afford, you need to be realistic about how much car you can pay for.
When you have bad credit and need a car, the best route is to find a vehicle that fits easily into your budget. By paying every payment on time, you can improve your credit standing and get a nicer car the next time around. When you overextend your budget, your purchase can bury you deeper into debt. It can damage your credit to the point where it could be challenging to qualify for a future car loan.
While your monthly payment must fit within your budget, savvy buyers know to look at the total cost of the car, including its financing. You also want to consider other costs of ownership, such as auto insurance, maintenance, fuel, and parking. Only when you have an idea of how much everything will cost can you start car shopping.
You can reduce the price of vehicles you’re considering in several ways. You can buy a lower trim level, and sacrifice a few features in pursuit of a lower price tag. You can step down a notch in the automaker’s lineup to find a more affordable option. For example, you can buy a 2020 Honda HR-V instead of the pricier 2020 Honda CR-V. Instead of buying a 2020, you can look for last year’s model still on dealer lots. You can also consider a used car to save thousands of dollars.
As a buyer with bad credit, the cost of a new car may be out of reach. Fortunately, there are plenty of excellent vehicles available on the used car market. Our used car rankings and reviews will help you find the best option, with the features you need and a cost of ownership you can afford. Opting for a certified used car gets you warranty coverage like you’ll find on a new car, with a price tag of a pre-owned vehicle.
Even within the used car market, there are ways to save money. You can look for a model that’s a little older and lower priced. Shopping from private parties, rather than dealers, takes more work, but can save you money.
One thing you don't want to do is buy the cheapest car you can find. You have to balance the price of the vehicle with its cost of ownership. If it's going to be costly to keep it on the road, even the cheapest car is no deal.
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3) Shop for the Best Preapproved Car Loan
It is critical to get a pre-approved loan in place before you get anywhere near a car dealership. A dealer may be able to find you an affordable financing package. However, they'll have no incentive to do so unless you have something previously arranged they have to beat. Though it’s very convenient to buy a car and get financing at one location, it’s a dangerous option if you have bad credit.
Here’s why: Dealers make a significant portion of their profit from marking up the interest rate on loans they arrange. In most states, they are under no obligation to tell you how much that markup is. Of course, compensating the dealer for the convenience is fair, but overpaying for the privilege is a waste of your money.
“A lot of consumers don’t know about that, and the dealer does not need to be transparent about that,” says Joe Pendergast, Navy Federal Credit Union’s vice president of consumer lending.
If they're not competing with a pre-approved offer, a dealer can be tempted to set you up with a financing package that makes them the most money, rather than providing you with the best deal. They want to sell you a car, and considering your ability to repay the loan may take a backseat in that endeavor.
Where to Get a Car Loan
Fortunately, there are plenty of places to find a car loan. Some, however, are more affordable and financially safer than others. Let’s look at a few of them in more detail.
Large National Banks: Big banks have the resources to offer a vast array of services at a broad network of branches. They typically have comprehensive websites where you can apply for car loans. What they often lack, though, is a personal touch and the flexibility to work with borrowers having bad credit.
Credit Unions: Varying in size from small operations to massive enterprises, credit unions are member-owned, not-for-profit cooperatives. Instead of paying dividends to shareholders, they return their excess earnings to members in the form of higher savings interest rates and lower loan rates. Not everyone can join every credit union. Membership is typically restricted to residents of specific areas, members of the military and other affinity groups, or employees of particular companies.
Many credit unions offer a breadth of services rivaling large banks, though not all do. Some offer special programs for troubled borrowers, and the smaller size of some credit unions allows a more personalized, flexible auto loan process.
Community Banks: Smaller than massive national banks, community and regional banks blend many of the benefits of both large banks and credit unions. They may not have all of the services of larger banks, but their smaller size gives them the flexibility to work with challenged borrowers.
Online Banks: Without the overhead of expensive branch networks, online banks can offer more affordable loan rates than some other lenders. They provide loan processes that are completed almost entirely online. Because many of their operations are automated, online banks may lack the personal service and counseling needed by borrowers with bad credit.
Finance Companies: Differing from banks by not accepting deposits, finance companies are solely in the loan business. They borrow money from other sources and loan it to car and other consumer goods buyers. Many finance companies specialize in working with consumers with bad credit. Their business practices vary greatly, however. Be sure to check with the Better Business Bureau or other consumer protection agency where they are based before you decide to do business with them.
Independent Websites: Independent websites can work with several lenders to find you the best deal available in the marketplace. Instead of applying at multiple lenders, potential borrowers just fill out one application, which is distributed to a variety of financial institutions. Because you only apply once, these websites can save you a ton of time. If you don’t recognize the company, you should check them out with the consumer protection organization where they are based before you give them any personal information.
Car Dealerships: While dealerships frequently arrange new and used car financing for customers, they’re usually just a middleman between the lender and the buyer. They charge a markup for this service, which is one reason to get your financing in place before you start car shopping.
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What to Watch Out For When Shopping for a Car Loan
Unfortunately, there are lenders in the marketplace that prey on buyers with poor credit. Many charge exorbitant interest rates to consumers who are desperate for a loan. They can employ aggressive techniques to repossess cars when a borrower is even a day late with their payment. Some install tracking devices and systems to disable vehicles, making repossession even easier.
Some of these lenders fall into a category called “Buy Here, Pay Here” used car dealers. Instead of acting as agents for banks and other lenders, these dealers finance the loans themselves. They get the name because many expect borrowers to return to the dealership as often as each week to make payments. These types of dealers typically make much more on the financing and fees than they do on the sale of the car.
When you see signs flying over a car lot proclaiming they can finance anyone, you should consider it a red flag and continue down the road. Interest rates of 20 to 30% are not uncommon. Such high rates make it difficult for any borrower, let alone one with financial problems, to get out of the debt trap they create. They are very aggressive with repossessions, which can damage your credit so severely your chances of ever working with a reputable lender are gone.
Simply put, if your choice is to borrow from one of these lenders or go without a car, the better option is to go without a car.
If you know you have bad credit and a lender offers you a loan deal for seven or eight years with no down payment or a balance of a previous loan rolled into your new financing, you might be tempted to take it. You probably should not. The lender is setting you up for an inescapable debt trap. When you have bad credit, you should expect to see shortened loan terms and restrictions on how much you can borrow. If you don’t, the lender likely does not have your best interests at heart.
How to Apply for an Auto Loan With Bad Credit
How you apply for a car loan isn't too different whether you have bad credit or good, or whether you're applying at a bank branch or online. You fill out a lengthy loan application that asks questions about your assets, income, employment, and monthly expenses. You'll have to provide your social security number so they can access your credit score and report.
It may ask for personal information, such as sex, marital status, where you live, and more. The lender can't use some of those items when making loan decisions. Still, they may have to ask for it for regulatory reporting reasons.
Subprime borrowers may be asked for more documentation than other borrowers. A lender may ask for a more detailed work history and proof of income, such as a pay stub. If your job requires a certification or license, they may ask for proof that it is current to ensure that you’re able to work.
The information from the application will be merged with data from your credit report to determine your debt-to-income ratio. The ratio is a good indicator of your ability to service the loan you're requesting.
If you want to get the loan, it is critical that you are honest and completely open with the information you supply on the application and in other communications with the lender. It’s easy to embellish items to increase your chances of being approved, but doing so can have dire consequences. Failing to be honest can result in a rejected application. If the dishonesty is found after the loan has been funded, the lender can immediately declare the loan in default and demand full repayment or change the terms of the loan.
To get the best deal, it's a good idea to apply at several lenders (as long as there's no expensive application fee). You must do so in a short period, so the credit bureaus see your shopping as an inquiry for one loan, rather than a series of them. When they see them as one loan, they'll only ding your credit for one query.
You might see a lender advertising car loans at 5%, but when you get your loan approval, the paperwork says you’ll be charged 14%. As a buyer with bad credit, you simply won’t qualify for the best interest rates and loan terms in the marketplace. One of the reasons you’ll want to compare offers from different lenders is to get a broad idea of what you qualify for.
In addition to a high interest rate, you may be asked to pay the loan back faster, make a sizeable down payment, or look for a less expensive car. You may not be allowed to roll the balance of an existing car loan into your new financing.
How Do You Compare Different Loan Offers?
Far too many car buyers only look at the size of the monthly payment when considering price and financing offers. A better method is to find the entire cost of the vehicle, including the amount of interest paid on financing during the loan term. When you look at the total cost, it's easy to compare competing loan offers.
Determining the total cost of a car is pretty easy. You multiply the monthly payment you find using a car loan calculator by the number of months in the loan term. You then add the value of your trade-in and the amount of money you’re putting into your down payment.
We’ll use the purchase of a 2020 Toyota Corolla as an example. It has a base price of $19,600. We’ll say you’re making a $2,000 down payment, have a trade-in that’s worth $3,000, and qualify for a five-year (60-month) loan with a 10% interest rate. When you subtract the down payment and trade-in from the price, it leaves $14,600, which will be the amount of your loan.
Next, plug the numbers into our auto loan calculator, and it tells you that each monthly payment would be $310. Multiply that $310 payment by 60 months, then add the $2,000 down payment and $3,000 trade-in value to find the total cost of the car. In this case, it's $23,600. Most online car loan calculators have a little bit of rounding error, so don't be surprised if your official loan paperwork varies by a few dollars.
Let's compare that to another offer. We'll say you have another lender who will offer you an 8% interest rate. However, they'll only do so on a four-year (48-month) loan. Plugging those numbers into the auto loan calculator shows a monthly payment of $356. You might think it's a lousy deal because the monthly payment is so high, but you would be wrong. When you multiply the $356 payment by 48 months, then add the $2,000 down payment and $3,000 trade-in value, it shows the total cost of the car is $22,088. By taking the shorter loan, you save more than $1,500, and you pay off your car a year earlier.
Be sure to include any taxes or fees in your calculations. Failing to do so can result in a nasty surprise when you get to the dealership’s finance office.
4) Don’t Panic if Your Loan Is Declined
You may be angry, frustrated, or depressed if a lender declines your car loan application. While those reactions are natural, being declined for financing may be a gift from a lender. When you're rejected for financing, it means that an experienced lending professional does not think you have the ability to repay the loan.
The rejection may have saved you from getting into a car loan you could not afford. Getting declined for a car loan does not affect your credit, but defaulting on a loan can lead to the repossession of your car and credit that’s trashed for the better part of a decade.
When you are declined for a car loan, the lender is required to tell you why and provide a copy of the credit report used to support their decision. It's an excellent opportunity to sit down with an expert to determine the steps you need to take to be approved the next time you apply.
What Not to Do If You’re Declined
While it may be tempting, don’t immediately run to a dealer offering to finance anyone. By doing so, you’re setting yourself up to get an expensive loan with horrible loan terms. Don’t try to use a credit card to buy a car. In most cases, you won’t be able to anyway. If you do, you will have locked yourself into an extremely high interest rate.
Don’t finance a car with a home equity loan or home equity line of credit (HELOC). Doing so risks both your car and home if you can’t make your payments. You also don't want to recruit a cosigner. While co-signing may be useful for you, it can be horrible for your cosigner and your relationship if you drag their credit down by missing payments.
You should use the time before applying for a new loan to save money for a larger down payment and improve your credit standing by paying all of your bills on time.
5) Shop for the Right Car
Finally, you're prepared for the next step on the car-buying journey. As you’ve gone through the auto loan pre-approval process, you will have narrowed your choices by setting a budget that fits your financing. Our new car rankings and reviews and used car rankings and reviews will not only decide the vehicle to buy, but they’ll also guide you to models for sale in your area.
Buying a used car from another private party is often the best route to a low price. You just have to offer the right price, study its vehicle history report carefully, and get a thorough pre-purchase inspection.
Our guide to buying used cars takes you step-by-step through the process of purchasing a pre-owned vehicle. You'll have to balance your desires with what fits into your budget and consider the trade-offs between features and age. The number of miles on the odometer has a significant effect on a car’s price, so be sure to figure that into your evaluation.
Buying a used car will usually give you the best blend of features and price, though purchasing a new car also has its benefits. If you're on the fence, our article on new cars versus used vehicles can help you make the right decision.
When you shop at either a new or used car dealership, you can expect to pay a higher price. However, they'll take care of the paperwork, usually accept trade-ins, and deal with any existing auto loans and title transfers.
6) Negotiate an Affordable Price
You probably have a price in mind you want to pay. The seller also has an amount in mind they would be willing to sell you the car for. It's through negotiation that you meet in the middle. Here's the problem, though. You likely only buy a car every several years. An experienced salesperson sells cars every day and is trained to move you incrementally to the deal they want to give you. You want to be prepared and confident in your offers, with documentation to back up your bids. Remember, once you propose a price, you can’t go lower. Once the salesperson suggests a price, they can’t go higher.
You want to remain focused on the price of the car, not the monthly payment. Though the salesperson might resist, you want to keep any negotiation about your trade-in value and financing separate from the price. That’s where pre-qualifying for an affordable financing deal comes in handy, as it takes that component out of the sales consultant’s hands.
Negotiating with a private party seller also has its challenges. Many have an emotional attachment to their vehicle that leads them to overlook its problems. As a buyer, you want to negotiate using information about how much those issues will cost to repair and what similar cars in the marketplace are selling for.
The most powerful tool a buyer has is the ability to walk away from a bad deal. It's one you should not be shy or embarrassed about using, as a bad deal can haunt you for years. Our article on negotiating the price of a car can help you through the process.
7) Finalize the Purchase
When you’re buying a car through a dealership, they’ll take care of all of the paperwork for you. Still, you’ll need to read through any documents to ensure they match the deal you agreed to. Never sign a document that is incorrect or incomplete, even if the dealer promises to fix it later. Once your name is on the paperwork, it’s much harder to argue it is wrong.
If you need someone to cosign your loan (not recommended), be sure to have them along, so there's no delay in the purchase.
Sometimes a dealer will allow you to take the car home before its dealer-arranged financing is finalized. Never do this unless you want to expose yourself to the yo-yo financing scam. Sometimes called spot financing, the dealer lets you leave with your new or new-to-you car. Several days later, you'll get a call saying something didn't work out with your financing, and you need to return to the dealership. When you arrive, you're presented with a new financing package that's much more expensive than the one you originally agreed to. Most consumers don't see an alternative to signing the new paperwork, even if they can't afford to.
If you fall into the spot-financing trap, you should call local credit unions and community banks to see if you can get a deal that looks like your original financing plan. If you can, get the pre-approval in writing and take it to the dealership. If you can't find affordable financing, you should unwind the original deal and walk away. The dealership staff may aggressively try to stop you from doing so, but no matter how much pressure they apply, you should not sign the new offer. Unfortunately, buyers with bad credit are often targeted for this unethical sales tactic, and are often unwilling to walk away from a lousy deal.
Buying From a Private Party
When purchasing your car from a private party, you and the selling party are responsible for all of the paperwork. That includes the transfer of title, bill of sale, registration, and anything else your state and lender requires. A smart seller may request you meet at your bank or lender to receive payment. Most will not accept a check, and many will request cash if the price of the car isn’t too high. You should never deliver the final payment until you have the car's title in hand.
8) Buy the Right Car Insurance
A side effect of having poor credit is you'll have higher auto insurance premiums. Because car insurance companies can show a link between credit scores and loss histories, in most states, they're allowed to charge varying premiums to consumers with different scores.
Car shoppers need to think about insurance prices on cars they're considering. Rates can vary substantially with different models, and those differences can be magnified by the penalties you pay for having bad credit.
The U.S. News auto insurance hub is a great resource to find the cheapest rates in your state, the best insurance companies, discounts you may be eligible for, and the coverage you need.
9) Make Your Car Payments On Time, Every Time
A car loan can be the ticket to your way out of having poor credit, but only if you make every payment on time and in full. Don’t make your payments, and a car loan can send you deeper into debt, with an even lower credit rating.
Even a year of on-time payments can lift your credit score several points, and potentially move you into a higher credit tier.
If you fail to make your car payments, a lender can place your loan in default and begin the process of repossessing your car. Some buyers try to hide their vehicles when they know the repo man is coming, but that's an idea that will bite you in the end. Repossession companies charge lenders to reclaim cars, and those costs are added to your loan balance. Play games that add more to the price of a repossession, and you just increase the amount you owe. Instead, a voluntary repossession, where you drop your car off at the lender, is a better path.
10) Refinance Your Car Loan
When you have bad credit and take out a loan, you’ll likely have to pay an astronomical interest rate. Fast forward to a year or so after making on-time payments. Your credit score is probably up somewhat, due both to your reputation of making payments and the declining loan amount.
Often that's a good time to consider refinancing your loan. If your credit score moved up enough to place you in a higher credit tier, such as from subprime to nonprime, you could lower your interest rate substantially. That means either lower monthly payments or a shorter loan term. If your score has moved up significantly, you might be able to remove any co-signer from your loan. According to the TransUnion credit bureau, borrowers knock an average of 2.4% off their car loan interest rates when they refinance. That takes an average of more than $50 off their monthly payments.
Though auto lenders might allow it, you never want to use a refinance to stretch out the length of your auto financing. In the long-run, such a move would cost you money, not save it.
Refinancing is much like applying for a typical car loan. However, some lenders have streamlined processes to make the process easier. Credit unions have been especially aggressive with auto loan refinancing, though you should also check with your current lender to see if they would be willing to take another look at your loan.
Our car loan refinancing guide takes you step-by-step through the process.
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