Bad credit is frustrating, especially when it comes to getting a new car. Bad credit plus car loans bring on thoughts of grungy used car lots and slick-haired salesmen. So if you have low credit, how can you avoid getting the run-around from sketchy salesmen?
That depends how “low” you mean. Low credit is usually defined as a score lower than 630. If you have late payments and collections on your credit report your chances of qualifying for a car loan is even lower.
But, it is not IMPOSSIBLE. If you don’t want to reduce debt and improve your credit first, you don’t have to give up. When applying for any loan the lender will look at your ability to make your payments on time. If your annual salary shows that you have the ability to repay the loan, then they will look at lending you the money.
Even if you have the ability to make the monthly payments on time, because your credit score is low, you will be paying higher than normal rates. Those “great rates” advertised in the newspaper? Probably not going to happen.
Lenders will also look at your work history and how long you have worked at your current job.
There are a few tips when looking for a car loan when you have bad credit:
- Shop around
- Be sure to keep your search within a two week period. Credit bureaus treat all credit pulls for car loans as one inquiry as long as they are made within this two week time frame. Don’t just take the first offer because you have low credit – there are lenders that will look at your situation and offer you a fair deal
- Be sure to do your homework before you start. Know your credit score and history. Take a look at your income and your existing monthly expenses. How much can you really afford. Phone your bank and local credit union and speak with representative to see what rates they would give you. There are a lot of sites on the internet that will allow you to ‘apply’ to find out your rate
New vs Old:
So often we think older or used is better. Choosing an older or used vehicle is not always the wisest choice. A car loan is really a secured personal loan. The loan is secured by the vehicle. If you choose an older or used vehicle, it’s value as security for the loan decreases. A few years ago, I looked at getting a loan for a used vehicle but when I did the math I realized I was not helping myself. The car was used so I knew there was a chance that it would need a lot of repairs before I paid it off. As well, if I purchased a new car, the interest rates were lower – in fact they were 1% vs. 8.5% for a used vehicle.
I did not look at the fanciest car with all the bells and whistles – instead I chose a small, economical vehicle without a lot of extras– great gas mileage and it had a 5 year warranty on major repairs. It was definitely my better choice. My bank offered me lower interest rates because they were comfortable with the ‘security’ for the loan.
Finance Company vs Bank
Dealerships will encourage you to finance with them. Don’t let them pressure you. Talk to the finance department and tell them you will call them later or tomorrow. Then call your bank or credit union to see what they would offer you.
NOTE: The one thing you don’t want the sales rep to know is that you are desperate because of your credit. Be confident – if they say your offer is based on their ‘final approval’ and let you drive the vehicle off the lot – DON’T DO IT. Once you leave the dealership could raise your interest rates significantly and you are stuck with a payment you cannot afford.
Still don’t qualify for a car loan?
Is there someone that would co-sign with you? Possibly a parent or sibling. They would need to have a credit score over 720 and a good credit history. The lender would then be comfortable to lend you the money knowing that they would cover should you miss payments. Again, if you have a co-signer same rules apply – purchase a smaller more economical vehicle without a lot of extras. Your co-signer may be more willing to sign if they know the monthly payment is reasonable.
Where is the best place to get a car loan?
- Your personal bank – they know you, know your finances. If they won’t help you there are other alternatives.
- Credit Unions – Credit Unions are there to be part of the community they are in. They will look at applications based on the story and often their lending criteria is not as stringent as a larger bank.
- Car Dealerships – all dealerships have a finance department and offer credit to their customers that are looking for financing. Be sure to compare their terms and interest rates before signing.
- Dealer Financial Services Group (DFSG) – this group specializes in providing financing assistance to dealers and their customers so that the customer can take advantage of multiple lending and insurance sources. They act as a broker and match the customer and dealer with an appropriate lender.
- On-Line Lenders – This will take a bit of research, but there are market place lenders and lenders on the internet where you can apply on-line to see how much you would qualify for and at what interest. These companies do a soft pull on your credit score initially to see if you qualify. Often their lending criteria is not as stringent as a traditional lender.
What if I have an auto loan with a HIGH interest rate?
If you’ve got a high rate, you aren’t trapped.
There are lenders that will refinance your existing car loan if you have made 12 consecutive on-time monthly payments or you have improved your credit score. The lending institution will need an appraisal on your car to insure that there isn’t any damage to it before determining a lower interest rate and term.
It can be challenging to find a car loan when your credit is bad, but there are still lenders who will take a risk. If the answer remains a firm ‘no’, then work on improving your credit score and try again in 6 months.
author name : Anthony Isaacson
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