Car Loans For Bad Credit
Updated: May 4, 2021
Buying a new car can be a daunting process, and for those who have bad credit scores, it might seem like the options to secure financing are limited. That being said, getting a new or used-car loan with poor credit is not impossible, but it is essential that you know what your options for car loans are beforehand. This article will discuss the options to get a car loan with a bad credit score.
What to do before applying for a loan
Check your credit score
Before filling out loan applications for a car loan, the first thing you should do is check your credit score. By checking your credit score with a credit bureau, you can identify any inaccurate information on your credit reports that harm your score and then dispute them. Having poor credit impacts your ability to get financing for auto loans because the lender sees someone with poor payment history as a risk. Lenders providing an auto loan will charge you higher interest rates to take on that risk.
Checking your credit will give you an idea of where you stand in your ability to receive financing without good credit. You can verify your credit score for free once per year through annualcreditreport.com.
If you do not need a new car immediately, you can take a few steps to improve your credit score: Pay bills on time, Reduce your debt, Dispute inaccuracies on the credit report, Pay for small recurring expenses with a credit card.
Determine how much you can afford
After figuring out, your credit score will help you determine what loan amount for auto financing with poor credit, you will be able to afford. Still, there are other costs associated besides loan payments with purchasing a car that you need to make sure you can afford. Major costs for car ownership include fuel, maintenance, auto insurance, registration, and taxes.
Save for down payment
If you do need a car immediately, then you should start saving for the down payment. The more you save for a car's down payment will come with multiple benefits. The higher the down payment, the more likely it will help you qualify for an auto loan, even if you need a car loan with bad credit. Without a down payment, the lender is taking on considerable risk, so putting down more money upfront is beneficial. In fact, many auto lenders will require a down payment of some kind. Most importantly, saving for a down payment will help decrease your car loan's high-interest rates because you will shorten the repayment schedule, which means you are paying interest for a shorter period of time. If you are looking to upgrade your current vehicle, you can trade-in your existing car as a down payment for your new vehicle.
How to get financing for a car with bad credit
Explore the various options to secure financing for bad credit auto loan
· Banks & Credit Unions: If you are currently using a bank or major credit union financial institution, begin here. Banks and credit unions often offer member discounts rates for car loans and have lower interest rates.
· Car Dealerships: If you meet the financial criteria to receive financing for a car, many dealerships will likely offer you a competitive rate for new or used cars. Many dealerships offer lending programs to borrowers who have a bad credit history.
· Online Lenders: Online lenders have tools on their websites that allow you to check if you will qualify for loan rates before applying. Getting pre-approval for loan offers can save you time and avoid having to do a hard credit check.
· Buy Here Pay Here Lots: Buy here pay here dealerships offer car-buying solutions to individuals who have a bad credit history or cannot qualify for an auto loan. Often, buy here pay here dealerships will advertise their auto loans as "no credit check" or "no credit, no problem" auto loans, appealing to consumers with low credit scores (generally a FICO score of 600 or below). Check out our article on Buy Here Pay Here Financing.
· Second Chance Car Loans: These loans are designed for people who have been turned down from traditional lenders due to bad credit. A second chance lender will assist you in obtaining financing for a car with bad credit. They can be a great option, but they usually come with high interest rates and fees.
Here are some options for bad credit car loans
Credit Karma suggests these 3 car loans from different lenders for those with bad credit
1. New Roads: They do not require a down car payment and offer discounts on interests on both new and pre-owned vehicles.
2. Carvana: They offer financing to individuals with bad credit as long as they are above 18, have a minimum income of $4,000 per year, and no active bankruptcies. They also act as a one-stop shop where you buy and finance at the same time.
3. Roadloans: This good for people who have filed for bankruptcy in the past, as long as the bankruptcy is currently discharged.
What to consider before getting financing for a car with bad credit
· Prequalify with lenders: Prequalifying allows you to see if you’ll qualify for a loan before you apply. With prequalification, you’ll save time in applications and avoid unnecessary hard credit checks. Multiple hard credit checks have a negative impact on your credit score.
· Shop loan terms: Low monthly payments can be misleading if they are paired with long terms for the loan. Since loan payments for car buyers with bad credit usually high interest rates, you can pay more than the cars' values by the end of the loan term.
· Consider co-signing: Finding a cosigner can result in a lower interest rate on your loan application. While the cosigner will be taking on considerable risk if you fail to make payments, this can be another great way to help improve your credit score.
· Make sure terms are final: Make sure all terms are final before signing. Failing to do this could result in higher interest rates, larger down payments, and unnecessary warranties.
· Beware of subprime loans: Subprime car loans can come with high interest rates and aren’t likely to help you improve your credit score.
Ultimately, it will be more challenging to get a car loan with bad credit, but it is not impossible. Before settling, make sure you have exhausted all the options to ensure you are getting the best option for your financial situation. Many times car loans for car buyers with bad credit will come with higher interest rates, so make sure you can consistently make those payments to help improve your credit score and avoid repossession.
Refinancing with WithClutch
More often than not, individuals are overpaying on their auto loans -- especially if you purchased a vehicle from a dealership. WithClutch can help you save money and time by allowing you to refinance your loan from the comfort of your home! Use the free Auto Loan Refinance Calculator to find out how much you could save.
If this is something that appeals to you, follow these simple steps to begin your refinance journey and get you on the best payment plan to finally be free of your auto loan.