Bad Credit Car Loans—What to Do & Why
By Sarah Sharkey
If you are shopping for a car loan with bad credit, you’ll quickly realize that you have a challenge ahead of you. It is entirely possible to obtain a car loan if you have bad credit. But it is easier said than done, especially if you want your loan to have reasonable terms.
We’ll take a close look at the ins and outs of getting a car loan with bad credit. Plus, we’ll show you what you can do to improve your approval odds.
Who Ends Up Shopping for Bad Credit Car Loans
Unless you live near a reliable public transportation option, a car is a critical piece of your financial well-being because you’ll likely need a car to get to and from work. Beyond that, your vehicle will be there to get you wherever else you need to go.
The fact that you need a car to get around doesn’t change if you have bad credit.
With this unavoidable need, many borrowers find themselves shopping for a car loan with bad credit. You might find yourself with a bad credit score due to missed payments or a history of credit mistakes. Or you might just be starting out and lack the credit history required for a good credit score.
Most widely used FICO Scores, the brand of credit score that is most commonly used by lenders, are determined on a scale of 300 to 850. The range for a poor credit score is 300 to 579, and the range for a fair credit score is between 580 and 669. But in general, credit scores below 670 are considered ‘bad.’
Take the time to check your credit score for free to see where you fall.
How to Prepare for Your Best Car Loan
If you find yourself shopping for a car loan with bad credit, there are ways to improve your chances of getting approved for a loan with reasonable terms.
Here are some strategies to help you prepare your credit for the best possible car loan.
Check Your Credit Report
If you have a bad credit score, checking your credit report is the best place to start.
For those who are not familiar with how the credit system works, It is easy to think that your credit score and your credit report are the same things. But your credit report is actually a detailed document that follows your credit history. It includes information about your credit accounts, payment history, credit inquiries, and more.
Your credit score is based on the information found in your credit report. So, any mistakes on your credit report could negatively impact your credit score.
With that, it is a good idea to take a look at your credit report. Scan the document for any mistakes. You want to ensure there are no errors on your credit report. If you find any mistakes, you can dispute the issue or choose to work with a reputable credit repair company.
For example, let’s say that you find several errors in your report. The mistakes include incorrect account inquiries and payment histories. You could significantly boost your credit score if you can remove the mistakes.
And the best part is that it is absolutely free to see a copy of your credit report at annualcreditreport.com. If you find any errors, check out our full post on how to remove them from your report.
Consider Credit Piggybacking
If you’ve checked over your credit report to ensure no errors, another step to consider is “piggybacking” on accounts that will show up to the credit bureaus.
Essentially, tradeline credit piggybacking allows you to gain an authorized user spot on another credit card. Key factors such as the age of the account, the credit limit, and the balance are displayed on your credit reports.
Tradelines have been shared in privileged communities for over 40 years. Today, universal tradeline access is available for purchase through Tradeline Supply Company, LLC.
Work on Positive Credit Moves
Beyond credit repair and tradeline options, you can take action within your personal finances to potentially boost your credit score. Some best practices when managing your credit ahead of a major loan inquiry include:
- Make on-time payments. A history of making on-time payments is the most important factor that can positively impact your credit score. If you have trouble remembering to make payments, then consider setting up an autopay option.
- Pay off debts, if possible. Existing debts on your books can drag your credit score down. If you can, try to pay off the balances.
- Avoid new credit inquiries. If possible, avoid opening new lines of credit immediately below applying for an auto loan.
Each of the options above may help to improve your credit score. But the downside to these tried and true methods is that it can take time for your credit score to reflect your responsible credit management choices. Because of this, you might not have time to wait for these actions to have an impact on your credit scores before moving forward with your car search.
Save up for a Bigger Down Payment
If you have a bad credit score, the amount you can borrow may be limited. Although you can likely find a lender willing to loan some amount towards your car purchase, a bigger down payment can unlock more purchasing power.
Not only can you buy a more expensive car with a bigger down payment, but you will also make the lender feel more comfortable lending money to you. That increased comfort on the lender’s side could translate to a more affordable interest rate.
Saving up the funds required to make a big down payment might not be easy. But if you have the time and resources, you could save a substantial amount on interest payments.
Before shopping around for a vehicle, try to get preapproved for an auto loan by a lender, like a bank or credit union. If you can obtain a preapproval, you’ll have a realistic idea of what price points you should be considering.
For example, the lender may only be willing to lend you half of the cost of your desired car. But if you shop around in that price range, you might find something you like.
Plus, having funding secured in advance when you shop for a car can help prevent you from falling prey to less advantageous financing deals offered by the seller.
Run the Numbers for Your Budget
Everyone will feel the pinch when adding a car payment to their expenses. If you find a lender ready to work with you, it is tempting to dive right in. But before you sign on the dotted line, run the numbers for yourself.
Consider how the monthly payment would impact your finances. Although the lender may decide that you can afford it, see for yourself if your budget can support a car payment for that amount. You might decide to opt for a more affordable vehicle to leave more leeway in your budget. After all, you don’t want to realize that your budget is stretched too tight when you’ve already driven off the lot.
The monthly payment is not the only number you need to look at, however. Consider the total cost you will pay for the vehicle overall, including interest and fees, as well as the length of the loan. A low monthly payment might not be worth it if you’re paying significantly more in the long run.
Stick to the Essentials
We’ve established that you likely need a vehicle to get around. But there are so many optional bells and whistles that you might easily overspend on nonessentials.
Ask yourself what you truly need in a vehicle before heading out to shop. Do you need a safe and reliable vehicle to get you from A to B? Yes. Do you need a ride that has the latest sound system? Probably not.
Take some time to consider what you truly need from a vehicle. If you are honest with yourself, you might be able to save big by opting for a more affordable choice.
Ask Around for a Cosigner
If you can convince someone with good credit to cosign the loan, you may be able to qualify for better rates and terms. However, finding a cosigner can be a difficult task. That’s because whoever cosigns on the loan will be legally obligated to repay the loan if you aren’t able to keep up with the payments, which would also hurt their credit.
Before you ask someone to cosign on your loan, think about what you are asking for. The unfortunate reality is that relationships can sour if you do not make your payments. You may decide that seeking a cosigner is not worth the risk to your relationships.
What You Should Know About Credit Piggybacking With Car Loans
Credit piggybacking could be the right move for your credit. By adding positive information to your credit report, you may be more likely to obtain an auto loan with reasonable terms.
To learn more about piggybacking for credit, see our articles about credit piggybacking and the fastest ways to build credit.
The Difference Between Good & Bad Credit Car Loans
Your auto loan options will look different if you have bad credit. But what differences should you expect to see when searching for a car loan with bad credit? The major differences lie in your offered interest rate, the loan amount, and the fees you should expect to pay.
Here’s a closer look at each of these considerations.
As a borrower with bad credit, you can expect to pay a higher interest rate. According to Experian, as of October 2020, here’s what the average interest rates are for borrowers with various credit scores. The rates you’ll find in 2022 won’t be exactly the same, but the general trend of interest rates for credit score ranges always remains.
- Borrowers with credit scores from 300 to 500 pay an average interest rate of 13.97% on a loan for a new vehicle and 20.67% for loans on used vehicles.
- Borrowers with credit scores from 501 to 600 pay an average interest rate of 11.33% on a loan for a new vehicle and 17.78% for loans on used vehicles.
- Borrowers with credit scores from 601 to 660 pay an average interest rate of 7.14% on a loan for a new vehicle and 11.41% for loans on used vehicles.
- Borrowers with credit scores from 661 to 780 pay an average interest rate of 4.21% on a loan for a new vehicle and 6.05% for loans on used vehicles.
- Borrowers with credit scores from 781 to 850 pay an average interest rate of 3.24% on a loan for a new vehicle and 4.08% for loans on used vehicles.
Based on the average interest rates above, you can get an idea of where you stand. It is clear that borrowers with higher credit scores can unlock lower interest rates. Conversely, if you are shopping with a bad credit score, you should expect a higher interest rate to come with your loan.
With a bad credit score, you’ll likely qualify for a smaller loan amount. That’s because the lender may be less willing to provide funds without a proven history of on-time payments. But with a good credit score, you have a better chance of qualifying for a higher loan amount.
In addition, along with bad credit and high interest rates, interest costs will make up a larger percentage of the total loan amount, leaving you with less principal to spend on a vehicle.
Typically, borrowers with a low credit score will find more fees embedded in their loan options. Although no one likes paying extra fees, you may not be able to avoid them with bad credit. But remember, you can always work to improve your credit score now and try to refinance your loan when the time is right.
Your Best Options to Consider for Bad Credit Car Loans
If you are ready to start shopping for your auto loan with bad credit, here are the best places to look.
Talk to Your Bank or Credit Union
If you are a customer at a bank or credit union, consider talking to them first. In some cases, banks and credit unions offer loans with attractive terms. As an existing customer, you may be able to qualify for their loan options even with bad credit.
Your financial institution may know quite a bit more about your financial picture than your credit score indicates. For example, they may be able to see a steady stream of paychecks or responsible bank account management practices that wouldn’t be reflected in your credit score. That information might be enough to provide a loan!
You should reach out to your financial institution before heading to the dealer if you want to explore their financing options. In some cases, your financial institution won’t be able to work with you based on your credit score. But it never hurts to ask!
Comparison Shopping Tools
When shopping for a loan of any kind, you can save big by comparing offers from multiple lenders. But the process can be tedious without the help of a comparison shopping tool. Luckily, several online comparison shopping tools can help you find the right auto loan.
Check out LendingTree and MagnifyMoney to start your search. You’ll likely see loan options from lenders like New Roads, Carvana, and RoadLoans, which each have a history of working with borrowers that have bad credit. As you explore the options, you should look closely at the terms and fees to ensure you can afford the final cost.
What to Expect From Dealer Financing
You may be offered a financing package when you head to the dealership. Most dealerships are willing to work out some kind of loan option. After all, they want to be able to sell cars. And providing an easy financing option can make that happen.
However, you should read the terms of any dealer offered financing very carefully before committing. You’ll likely pay a higher interest rate through the dealer in most cases. Plus, there are often extra fees attached that inflate your total cost.
If dealer financing is your only option for getting wheels on the road, it is worth considering. But make sure you know what you are signing up for before committing.
The Bottom Line: Getting a Car Loan With Bad Credit Is Possible
If you have bad credit, you might feel discouraged when starting your search for a vehicle. But the good news is that there are plenty of options for borrowers with bad credit. Although it may take time and energy to track down the right deal, it is possible to get the wheels you need.
As you go through this process, you’ll quickly realize how much a good credit score could impact your life. Instead of searching high and low, borrowers with good credit scores can easily find attractive financing opportunities on big purchases.
With that, it might be time for you to start your credit improvement journey. Learn more about credit-building methods with Tradeline Supply Company, LLC today.