Did you feel hopeless the last time you downloaded your credit report? A bad credit score shouldn’t make you feel depressed because managing debt isn’t always easy. Are you worried that you won’t own a car by the end of this year? Cheer up because this post is all about car loans for people with bad credit.
1. Can I get a car loan with bad credit?
If your credit score ranges from 300-579 then you have a bad or poor credit score. Are there sellers willing to offer you financing? Yes, there are. However, the terms and conditions of car financing vary with each seller. Credit lending institutions have strict terms compared to car dealerships.
Vehicles for bad credit have high-interest rates compared to typical car loans. Why? Because the seller wants to minimize the effects of credit default. It’s almost impossible to buy a car without putting any money down. One advantage of poor credit car loans is you’ll get long repayment periods ranging from 36-48 months.
2. Are there car loans for people with really bad credit?
Truth is, each car seller has their own definition of really bad credit. The car lot situated two blocks away from your home might offer auto loans to buyers with credit scores of 500. However, the one next to your workplace has its minimum credit rating at 420. Are these two car financing deals the same? No, they’re not because a credit score determines the loan’s interest rate.
Since a bad credit score indicates a high risk of default, car dealers limit such buyers to purchasing used cars. If you need a car really bad, then you should get a bad credit auto loan because if you buy a good car, you’ll get a good trade-in value for your second one. It’s also more affordable than leasing when you compare the monthly payments.
3. Can I get a poor credit used car loan?
Yes, you can, In fact, most car lots prefer selling used cars to buyers with bad credit ratings due to the high risk of default. While it seems a bit unfair, you can get a nice car manufactured in the past couple of years that’s in great condition. How? By doing a lot of window shopping in order to spot a car dealership selling amazing used cars.
Are you in college and planning to buy your first car? A bad credit used car loan can help you attain your dreams sooner than you expect. If you plan to go modest, it will take you a short time to come up with the down payment. After paying your loan, your credit score improves significantly and you’ll have access to better car financing deals.
4. What is the average payment for poor credit auto loans?
Recent statistics show that most buyers prefer paying no more than $500 each month for their car financing. College students opt for this monthly payment because it matches their modest income derived from part-time jobs and startups. Buyers who’ve just got their first permanent job after a long duration of unemployment cannot afford to pay thousands of dollars in car payments. If you’ve recently come out of debt settlement or bankruptcy, you’ll need a car with very affordable monthly payments. That’s why the national average ranges from $500-$550.
Smart car buyers pay low monthly payments by showing up with hefty cash deposits. If you can save at least half of the car’s price before getting auto financing, you get a really affordable repayment plan.
5. How does a cosigner for a car work?
A cosigner is someone who steps in to help you win your creditor’s trust when applying for a loan. First-time car buyers with poor credit scores often need cosigners due to insufficient credit histories. You’ll come across car dealerships that require buyers who’ve ever applied for debt settlement to present cosigners when applying for financing.
The main role of a cosigner is to pay any skipped payments and accrued fines during your repayment period. He or she assumes financial responsibility when the buyer suffers severe injuries that make them unable to work or passes away. Your creditor also gets personal information about you from a cosigner, such as, how long you’ve lived in your current residence.
What are the requirements of a cosigner?
· An excellent credit score.
Your creditor needs assurance that financing your car won’t turn out to be a bad idea. That’s why they need a cosigner with a good credit repayment history. Excellent credit score ratings range from 750-850.
· Resided in the city for a certain number of years
Serial defaulters relocate frequently from one city to another in order to flee debt collectors. A cosigner earns your creditor’s trust if they’ve resided in your city for a specified number of years consecutively.
· Earn a specified monthly net income
In the event that you’re unable to pay your loan, your cosigner takes over the outstanding balance. Your creditor wants a cosigner with a high net income to minimize the risk of turning your outstanding balance into a bad debt.
6. What are the requirements for poor credit car finance?
1. Proof of identity
Identity thieves are using more sophisticated tactics for obtaining car loans using victims’ identities. Credit institutions and car dealerships require you to present your original identification documents for verification purposes. Make sure you carry your driving license or passport if you’re a foreign student.
2. Earn at least $1,500 per month
Credit institutions believe that any buyer who earns at least $1,500 as gross monthly income can make car payments consistently. Why? Because the national average car payment ranges from $500-$550.
3. Own a cell phone
In this day and age, it’s virtually impossible to survive without a cell phone. Creditors need to have your current cell phone number to contact you when you don’t make payments on time.
4. Resided in the city for a minimum period
Each year, banks, credit unions, and car dealerships have to scrape off bad debts due to defaulters who flee immediately after receiving their loans. However, trustworthy debtors have a very low relocation rate. The minimum period of residency ranges from 3-5 years.
5. Own an active bank account
Creditors prefer to make deductions from your gross salary as soon as your employer deposits it in your bank account. Obviously, to minimize the risk of default. It also acts as proof of consistent income for self-employed car buyers because credit lenders ask for bank statements.
6. Have a permanent source of income
Credit lenders only deal with buyers who have a permanent source of income because it indicates the ability to make monthly payments on time consistently. Some creditors request buyers to present copies of their paychecks for the past six months. If you’re self-employed, you’ll present bank statements for the past one year.
7. A minimum debt-to-income ratio of 43%
Debt to income ratio refers to the proportion of your monthly debt payments in relation to your gross income. If you earn $2,000, your total monthly debt payments shouldn’t exceed $800.
7. When should you apply for bad credit car financing
1. When a college student car loan cannot get you what you want
When you compare a college student car loan and bad car credit financing, you’ll realize that the latter is expensive. However, college student programs target low budget buyers. This might be a problem if you want to get a car that’s flashy and robust engine.
On the other hand, bad credit car loans offer buyers a wider variety of vehicles. You might even spot a few luxury car models that match your desires and budget. A college student car loan won’t help you meet your car needs if you want to spend big bucks.
2. When you’ve just come out of debt settlement or bankruptcy
Debt settlement greatly affects one’s credit score. A poor credit rating decreases a debtor’s chances of getting normal car loans. However, that doesn’t condemn one to use public transport for life. The best financial move is improving your credit score by applying for a secured debt. In this case, a poor credit score auto loan.
If you pay a good down payment and pay your monthly installments on time, your credit score starts showing major improvements after six months. By the end of your repayment period, you’ll have restored your credit score to a higher range.
3. When you have an insufficient credit history
Perhaps you just got hired and you now want a car for daily use. However, you’ve been denied car financing because of insufficient credit history. Well, it’s not your fault because some people prefer debit to credit cards. You might lack credit history if you’ve never borrowed a bank or credit union loan.
If you’re not planning to save up the entire price, consider applying for bad credit car financing. Car loan history improves your credit history because it’s a long-term secured debt.
4. When you’re planning to get another car loan soon
Applying for a car loan improves your chances of getting better car financing deals in future. Why? Because future creditors feel confident about financing a car belonging to a buyer with good repayment history on previous auto loans.
One way of saving money on your next car purchase is doing a trade-in. Bad credit auto financing gives you access to sedans, SUVs, and pickup trucks so you can always have good options when you’re purchasing with doing a trade-in much later.
Suggested read: Do you have negative equity?
8. 5 Alternatives to Poor credit auto loan financing
1. Saving up for the entire amount
If you feel committing to a long-term loan involving high monthly payments isn’t your cup of tea, there’s a safer way of purchasing a car. That’s paying the entire price in cash. It gives you full ownership rights on the spot and has no effect on your credit score. Plus, you don’t need a cosigner to earn the seller’s confidence.
First, you’ll need a fixed savings account to pool your savings together for a specified period. You’ll also need to eliminate or minimize some recurring expenses in order to attain your savings goal on time.
2. Improving your credit score for a better car loan
Bad credit car financing is really expensive. A buyer with a credit rating of 500 pays thrice the interest rate used on someone with a score of 800. Plus, the late payment fines are also high. If you’ve just come out of a nasty debt trap, the last thing you’d do is get into a high-interest long-term debt.
Since you want an affordable credit financing deal, take at least six months to improve your credit score. You might need a qualified and experienced financial coach to help you create and implement this strategy.
3. Car dealership financing
This method is for those buyers who need cars urgently and don’t meet certain requirements for poor credit financing. For instance, insufficient credit history or really bad ratings. In order to qualify, one needs a high net income and residing in the city for a specified period.
How does car dealership financing work? A car dealer allows a buyer to purchase a car on credit based on specified terms and conditions. Unlike ordinary auto loans, car dealership financing doesn’t involve any banks or credit unions. The buyer drives off after paying an agreed down payment and committing to make monthly payments at a high interest rate.
4. Borrow from friends and relatives
If you’ve just got a new job that’s well paying but situated in a different city, you definitely need a personal car. Commuting on a daily basis is expensive and unreliable because bad weather causes several delays. If your job requires you to leave the office at late hours, you need a car to enhance your security when traveling at night.
Do you have good friends and relatives? Reach out to them and explain your urgent need for a car. All you need to borrow is an amount that’s equivalent to half of the car’s value. Why? because you’ll show up with a good deposit and lower your monthly down payments.
5. Staff car loan
If you have a bad credit rating, you can still get car financing by applying for a staff car loan at your place of work. Staff car loans are available for permanent employees earning a specified monthly gross income. All you need to do is raise a good down payment and your employer will deduct monthly installments from your paycheck.
9. Advantages and disadvantages
1. Gives you a wide variety of cars
A bad credit auto loan enables you to purchase a car that suits your lifestyle needs. You’ll find a variety of personal cars ranging from modest to luxury brand models.
2. Drive off after paying your down payment
If you need a car urgently, you’ll get a set of wheels right after paying your down payment. Since car financing is a form of secured debt, your creditor holds on to the car title until you complete your payments.
3. Directly improves your credit score
Paying your car financing monthly installments on time improves your credit score significantly. Why? Because according to FICO, payment history constitutes 35% of one’s credit rating.
4. Improves your automotive credit history
What is an automotive credit history? It’s a statement showing your performance with previous auto loans. Car dealerships obtain this information from your credit report. That’s why clearing your bad credit car loan on time enables you to get better auto financing deals in future.
5. You qualify for refinancing
Car loan refinancing is whereby you get your creditor to impose new terms and conditions to your outstanding balance. In case you experience temporary financial problems, you can lower your monthly payments by applying for refinancing. You can also apply for refinancing when interest rates drop nationally.
1. Very expensive
Bad credit car loans have really high interest rates. That’s why most buyers end up requesting for the longest repayment periods to lower installments. However, they end up paying a lot of interest for the credit financing.
2. Not all dealerships offer new cars for bad credit car financing
Some car dealerships prefer offering used cars to customers with bad credit to avoid incurring bad debts. This can create a challenge if you’re planning to do a trade-in after clearing your loan due to the effect of depreciation. Plus, you might need to spend extra money to replace aged interior or exterior components.
10. Tips for buying a motor vehicle with bad credit
1. Download your credit report before applying for a car loan
Credit lenders expect you to know your credit score before applying for financing. If you apply with a credit score that doesn’t meet your lender’s requirements, you lose your application charges. Downloading your credit score in advance helps you to sort out any issues with past creditors.
2. Have at least half of the car’s price for your down payment
Now that you know the reason why credit lenders impose high-interest rates, you can prepare for this by saving up a hefty deposit. Make sure you have at least half of the car’s price because it will lower your monthly payments by a huge margin.
3. Make your car payments on time
Making your car payments on time builds your credit score and also helps you to avoid late payment fines.
11. Are you ready for car financing?
Car financing is necessary for today’s market because it enables more and more people to afford decent cars. On the other hand, you’ll come across stories in the newspaper of debtors who went broke due to the pressures that come with ridiculous monthly car payments.
The secret to getting affordable monthly payments is reducing your outstanding balance. Plan to show up with at least 50% of the car’s price so that you can clear your loan in 24 months or less. Smart car buyers go for reasonably priced cars in order to pay affordable insurance quotes.
Finally, remember to use a car loan calculator to confirm whether the creditor has given you the correct monthly payment figures.