No matter the circumstances that led to it, having a bad credit rating can make it difficult to get financing for a car. Generally car dealers will raise their interest rates significantly for buyers who have poor credit. They consider these kinds of borrowers –
known in the industry as subprime buyers – to pose a greater risk of non-repayment compared to those with great credit scores.
Still, even with a low credit score, it is vital that you reach out to reputable lenders and banks to find out the options available to you for financing of your car loan instead of settling for credit at a high interest rate.
You can follow the following guidelines to ensure you secure financing on fair terms:
1. Ask Yourself If You Really Need a Car
Are you looking to buy a car because you do not have any other means of transportation or are you actually looking to get into debt over a luxury item? It is recommended that you should only consider purchasing a car with bad credit in an emergency.
Before you begin to shop around for an auto loan, carefully consider your situation and figure out if there are other options available such as sticking to your current set of wheels, car pooling or switching to public transportation for a few months to a year, using the time to rebuild your credit.
If you must get a car with bad credit, you should be prepared to pay a high-interest loan to finance your purchase. If a poor payment history is the reason for your bad credit, take a few months to pay your bills on time. If you push off buying a car for even a couple of months, your credit score may improve enough to allow you to borrow at better rates.
2. Rebuild Your Credit Score
If buying a car is not an emergency, you could get a secured card and spend six months to a year using the card responsibly. A secured card is a great way to build up your credit score if you do not have a credit history or to rebuild credit if you have a poor score. You are issued with the card when you make a deposit to your bank, and the deposit is refunded when you close the account.
When you use a secured card for your purchases, you are actually buying on credit. As long as the issuer of the card reports positively on your payment history to major credit bureaus, you will start to build up your FICO score as well as improve your credit history.
On the other hand, a secured card may not be a good idea if your bad credit is as a result of misuse of credit cards. In this case you should stay away from credit cards until you are satisfied that you have your spending under control.
3. Check Your Credit Score
- Do not take your dealer’s claim that your credit score is bad at face value. This is because you have a right to a free credit report once a year. Find out for yourself what your credit rating is, see the activity that has resulted in your score and whether your report indicates any suspicious activity.
- Take your credit report along with you every time you meet potential lenders to ensure you are all on the same page when talking about financing your car. You can try talking to lenders about your credit history if there is a good reason for any negative items on the report and try to see whether it could affect the interest rate offered. There are lenders who may be willing to help you get a fair rate if there is a good reason for your poor rating.
4. Shop Around For the Best Rates
Never assume that simply because your credit rating is bad, you will be denied a car loan. In fact, many borrowers think that their credit is bad when it might not necessarily be the case. Your definition of a poor credit score may be very different from that of your lender, with different lenders willing to offer you different rates on your loan. Carry out adequate research and find out what each lender charges to ensure you get the best deal possible.
One way to do this is to check up on a lender’s car loan lending rate sheet, which will let you know what the lender’s rates are for both new and used vehicles for borrowers within your credit score bracket. Always bring this information along with you when you meet a lender.
5. Limit Your Search Timeframe
In a cruel twist of irony, applying for a loan automatically means that lenders will look up your credit score, with each request for your credit report negatively impacting your credit rating.
However, there is one way to game the system; current scoring models count all credit inquiries performed by lenders within a timeframe of two weeks as a single inquiry. This means that you should limit your search for an auto loan to within this two-week window and only apply for a loan when you are ready to borrow. Failure to do this may make your credit situation worse.
6. Choose a Short Loan Period
Although a five-year loan may present you with lower monthly repayments compared to a three-year loan, it is important to pay attention to the difference in interest rates. In general, shorter-term loans come with lower interest rates, which mean that you end up paying less overall. As a plus, you will have a few years where you do not need to worry about car payments, leaving you to focus on paying off other debt and improve your credit.
7. Consider a Newer Car over an Older One
Conventional wisdom might lead you to believe that an older vehicle costs less than a new car, but the truth is that financing for older cars attracts much higher interest rates compared to new cars. If you are seeking financing for a car, you should look at newer ones first, followed by newer used cars
– these are vehicles that often offer the best financing options.
Regardless, it is still possible to find great deals on older used cars, so it is an option that should not be completely written off. You could be pleasantly surprised to find an older car which you can afford to buy outright, eliminating the need for financing.