Getting a car loan isn’t impossible when you have bad credit
All it takes is one late payment for your credit score to drop nearly 100 points. Even with otherwise great credit, a significant drop in your score can take several months to start rebounding, and that’s if everything else is perfect. Want to see it back to its all-time high? That will take a year or more.
Or what if you’re just out of school and have poor credit because you’ve never used credit? Your car is on its way out and the only way you can afford a new set of wheels is to get a loan. Does having bad credit mean you have to succumb to payday lenders?
No, there are plenty of ways to get money on better terms. It will take some work and maybe even changing your mindset as to what vehicle you want and when you get it. But that’s life. Not everything goes as planned. With a bit of work, you can get loan offers from banks, dealerships, and online lenders.
Set your budget for your new car
You probably have a good idea of the type of vehicle you want, but have you considered how the cost will impact you? Sure, you’ll have an auto loan, but you need to make payments for five years, and some lenders now stretch that out to seven years. No doubt paying for a $20,000 vehicle over seven years will result in lower payments ($405 versus $311) than if you do it in five. With the longer loan, you’ll also be paying an extra $1,853 in interest if your interest rate is 8%. What could you do with almost two grand? Play around with a loan calculator to see how the math works with various loan amounts and loan rates.
Consider your needs versus your wants
Let’s go with the presumption that you do need a new car to get you to work and the kids to school. You probably don’t need an SUV when a basic sedan gets the job done. Likewise, if you need a work truck that will get plenty of wear and tear, a used one is a better financial choice than a brand new one.
How much of a down payment can you put down?
Obviously, the more you’re able to put down, the less you’ll need to finance. Also, it will help lenders see that you’re serious and can come up with the money since they don’t want you to default on the loan. A good rule of thumb is to put down a minimum of 10% for a used vehicle and 20% for a new one.
What size of a monthly payment can you afford?
Keeping your monthly payment to no more than 10% of your monthly income will ensure that you can afford it, plus other car-related expenses like fuel, insurance, and maintenance. The less you have to spend on a car payment, the more you should save up for a down payment. Also, be sure to buy a car that fits your budget. Going over by $10 to $20 won’t make a significant impact month-to-month, but the more you go over budget, the tighter your household budget will be. As your income goes up over the years, you can move up in the car, getting a nicer one each time you buy.
Raise your credit score
Since raising your credit score takes time, the sooner you start working on it, the better. Depending on how low your credit score is, getting a good credit score can take months or years.
Your FICO Score
score consists of five areas of financial responsibility, with each being weighted differently.
- 30% is based on the amount you currently owe
- 35% is based on your payment history
- 10% is based on new credit
- 15% is based on the length of your credit history
- 10% is based on the mix of credit types that you have
Here are some things you need to do to boost your credit score. Remember, none of them are quick fixes. Be consistent, and your credit score will go up.
Paying all bills early or on time
Most bills can be paid online, so it takes just a few minutes to pay manually. Save time by setting up an auto-draft, and you’ll never miss a payment. For the rare bill that requires a check, mail it at least a week early, or hand-deliver a few days in advance.
Eliminate old, bad debts
Get a copy of your credit report from the three credit bureaus (Experian, Equifax, and Transunion) and check to see if you have any old debts that need to be paid off. Try to negotiate with the lender, especially if the loan is more than two years old. They may waive the interest or reduce the amount if you pay in full.
Report errors on your credit report
Experts believe that up to 20% of Americans have errors on their credit reports. This happens when billing departments make typos with names and social security numbers. In some cases, these errors could be fraud, so check into any entries that aren't familiar to you.
Close excess credit accounts
There’s no reason to have a Sears charge card if you haven't shopped there in the last decade. Evaluate all of your accounts and close the ones you don’t need. However, try to keep the oldest one because your length of credit is a part of your credit score. If you’ve had a Capital One credit card
for 15 years and a Discover one for just five, close the Discover one so that the number of years doesn't change.
Reduce your overall debt load
The amount of credit you’re using, in relation to all that’s available, has an impact on your credit score. When you have cards near the limit, you have a high ratio, which negatively affects your credit score. Paying down your debt will help. Another tip is to request a credit line increase. This can be done online when you log in, and while it's not always granted, it will increase your available credit, so your debt is a smaller portion overall. Only do this if you are disciples and in control of your spending.
Debt Consolidation Calculator
Finding a lender for your auto loan
Once you’ve started taking action with raising your credit score and have a budget for your vehicle in mind, it’s time to start looking at your financing options. There are four main options to check out.
Bank or credit union
Call your bank’s loan department and talk to a lender to see if they will be able to underwrite a loan for you. The interest amount, if they can offer you a loan, is determined by your credit score. They will likely want you to have a cosigner if you are considered a subprime borrower, meaning you have a low credit score.
In-house financing from the dealer
Large auto dealerships, and online car sites like Carvana, offer to finance in-house, which is convenient. Get your loan serviced by the same place that services your vehicle. The downside is that their interest rates won’t be as low as a traditional lender. Expect a higher interest rate.
Car dealerships usually have preferred lender relationships with a particular bank and will get you connected to the right people so that you can get a loan for your vehicle. You may need to get prequalified by the lender, but they have an incentive to give you a loan, so there’s a good chance you’ll be approved. You’ll likely need a cosigner plus a sizable down payment.
All it takes is a quick search for cars on Google, and you’ll start seeing pop-up ads for online auto loan providers. While it never hurts to check out their websites to get the details, do be careful if this is the path you take to pay for your new car. These lenders specialize in bad credit auto loans and offer online loan applications.
Do your research to ensure lenders are legit by checking their rating with the Better Business Bureau, reading all the online reviews (both the good and the bad), and research the company with the state’s attorney general's office. Finally, beware of red flags like them saying they won’t run a credit check or that you need to pay upfront.
Additional tips for getting a loan with bad credit
As you consider your options for getting a loan for your next vehicle, here are some things to keep in mind.
Find a cosigner
For those who have no credit, or bad credit, you will find that most lenders want you to have a cosigner. This person is responsible for the loan payment if you fail to make them. Their good credit will help you to get a loan, but remember that this will negatively affect them if you mess up.
Save up a large down payment
Do whatever you can to have a nice chunk of cash ready to hand over when you sign the sales agreement. Besides helping you secure the loan, the less money you borrow, the less interest you will pay over the life of the loan.
It’s essential to speak to the different lenders within a few days of each other because they do credit checks that show up on your credit report. Too many of these is a bad thing because it signals that you’re looking for more credit. But if you do them within a short period, these hard pulls are lumped together as just one.
Skip add-ons and upgrades
Keep your loan to a minimum by choosing just the basic features on your car. You can always pay for upgrades later and with cash.
Consider refinancing your loan after a year
After the first year or two of on-time payments, you should have more creditworthiness and be able to get a new loan with a lower interest rate. This is most useful if you have a dealership loan at a high interest rate and can get a bank loan at a much lower one.
The bottom line
Finding a lender who will give you a loan even though you have bad credit or no credit isn’t hard. It does take some effort to get auto financing though. You’ll need to create a budget so know that you can afford the monthly payments and then take action to improve your credit score. Then it’s time to narrow down your vehicle options to ones that fit your budget while meeting your transportation needs. Finally, talk to auto lenders to see which ones can offer you the best terms on your car loan.