Your credit history is a big factor in getting approved for a car loan. Not only that, your credit card will affect the interest cost you pay financing your purchase. Unfortunately, buying a car with bad credit is tough, even if you have the income and a stable job history. A history of late payments, high debt, bankruptcy, or repossession is a sign to the lender that you're at risk of defaulting on your loan payments, and lenders want to avoid the expensive process of repossessing your vehicle.
Bad credit doesn't have to stand in the way of your new set of wheels, but you'll have to shop a little differently and be prepared for a higher cost. Go into the process as informed as possible to avoid being taken advantage of.
Work on Your Credit Before Going Car Shopping
Check your credit report as soon as you start thinking about buying a new car, even if it's months or years in advance.
By cleaning up your credit before applying for a loan, you improve your chances of being approved with good terms.
Identify items that are hurting your credit score then cleaning up your credit by paying off past-due accounts, disputing credit report errors, and adding positive information to your credit report before a car dealer ship looks at it.
Avoid Additional Bad Credit Items
In the months leading up to your loan application, be on your best behavior. Pay everything on time. Don't take on any other major credit obligations, opening new credit cards or charging high credit card balances. Potential red flags for an auto lender include late rent payments, charge-offs, debt collections, bankruptcy, tax liens, and lawsuit judgments.
Check Current Interest Rates Before Buying a Car With Bad Credit
You can check online for the latest average auto loan rates to better understand what rate you should expect. With good credit, you would qualify for a rate at or below average. With bad credit, you'll typically have a higher interest rate, but be skeptical of any loan rate more than double the average. Your loan rate will affect not only your monthly payment but also the price tag of the car you can purchase.
Make a Bigger Down Payment
Your credit history will limit the size of car loan you can get, and a high interest rate will make the amount even lower. A down payment can offset the interest, taxes, and fees and widen the selection of vehicles you can choose from.
Know What You Can Afford to Pay
Avoid overestimating what you can afford so that you can get into a better car. Instead, consider how much extra money you have left over after paying bills each month. That's the amount you're able to afford. Check your budget to see what you can really afford to pay and stick to that amount, even if you're approved for a loan with bigger payments.
You can shop more realistically when you have a pre-approved loan amount to work with. Talk to your bank or credit union about getting a car loan and to find out the pre-approval process. If you can't get approved with your bank, your car salesman may be able to put you in contact with a lender who caters to car buyers with bad credit.
Skip the Extras
When you're buying a car with bad credit, you may not be approved for a high loan amount, which may mean you have to sacrifice some of the features you want. Leather seats, a sunroof, and a premium speaker system may not be options. You're already facing a higher loan payment because of the interest rate. Don't make it bigger by loading on all the latest features.
Check With Nonprofit Agencies
Before you take on an expensive car loan, check to see if your state has any nonprofit agencies that provide loans or vehicles to low-income consumers. Unfortunately, there's not a program in every state.
Tread Carefully With Buy Here, Pay Here
Buy here, pay here car lots offer on-site financing with less stringent credit qualifications (sometimes with no credit check), but they also have a reputation for being overpriced, selling poor-quality vehicles, and taking advantage of consumers with bad credit. Ask for recommendations for a dealership, and check the value of the vehicle and the vehicle history.
If you can, take a mechanic friend shopping with you to check out the car to make sure it's in good condition.
Read All the Paperwork.
Loan documents can be confusing, but your money and your credit are on the line, so it's important to take time to understand the terms of the loan. Make sure the paperwork matches everything the dealer verbally agreed to. If you agree to the terms, sign the loan documents before you drive the car off the lot.
Some shady dealers let you drive away without signing, then call you back to sign papers with terms that are drastically different from those to which you originally agreed.
Don't Buy With the Expectation of Trading for a New Vehicle in a Couple of Years
One of the ways car salesmen get you into a car is to build up your hopes of trading in next year. Sounds like a great deal, but when you do this, the balance of the old loan is added to the new loan and your payments increase or your repayment period extends. Don't trade unless you improve your credit and can qualify to refinance at a lower interest rate.
Watch Out for Scams
People with bad credit are the target of countless scams. Don't fall victim to predatory loans, no matter how much you want to be in a new car. Too often these loans end up poorly for the car buyer and result in yet another blemish on an already tarnished credit record. No matter how desperate you are for a new vehicle, take your time, get all the facts, and make the most financially sound decision you can.
Frequently Asked Questions (FAQs)
Does financing a car build credit?
Financing a car can build your credit. It may initially lower your credit because you've taken on your debt, but it could help increase your score over time. For it to build your credit, you need to make your payments on time. If you miss payments, financing a car will hurt your credit rather than build it.
Can you buy a car with no credit?
Someone with no credit will face many of the same challenges as someone with poor credit. Your best options are to find a co-signer with established credit, increase your down payment, or see if you qualify for any special loan programs. For example, some lenders offer special loans for college students and recent college graduates.