8 Steps to Get an Auto Loan With Bad Credit
July 31, 2019
If you have bad credit, the process of buying a car can be tricky. Aside from finding one you like at the right price point, you have to consider approval for a car loan. You may be wondering if you can even qualify for a loan with bad credit.
While it’s not easy, it’s possible. You’ll have to shop more carefully and prepare for higher prices and interest rates. Below are helpful steps for when you decide it’s time to start the process of buying a new car.
1. Get a Copy of Your Credit Report
Before applying for a loan, check your credit score and get a free copy of your report. This way, you can see where your credit lies on the spectrum from excellent to poor.
You will have a better understanding of what credit score range you’re in and can then apply for loans specific to your credit profile.
2. Clean Up Your Credit Before Applying
To help improve your chances of getting approved for an auto loan, start planning a few months or even a year in advance. By cleaning up your credit, you may have a better chance of qualifying for an auto loan and a better interest rate.
Take proactive steps to improve your credit score:
- Pay off past due amounts
- Pay bills on time
- Dispute any credit report errors
- Avoid taking on any new credit obligations
If you have a negative payment history, see if you can dispute it. If you’re able to remove negative items from your credit reports, it can boost your credit score. If you have a high credit utilization ratio, paying down balances on your revolving accounts can also boost your score.
3. Calculate What You Can Afford to Pay
Do thorough research to avoid common auto loan mistakes before beginning the process. The next step is to figure out what you can afford by creating or updating your budget.
Factor in the monthly amount, interest rate, and see what balance you would have left each month. After calculating what monthly loan amount you can afford, this will help you narrow down a car in your price range.
4. Research Types of Lenders
Do thorough research so that you’ll be prepared to make an informed purchase and negotiate with the dealer. Before applying for a car loan, compare different lenders and interest rates to see what you may qualify for. There are alternative options for people with bad credit.
Buy Here Pay Here Dealership
Dealerships often have relationships with banks and will try to help you get the best deal possible. Buy here pay here financing is essentially a one-stop-shop process. The dealership where you buy your car will also arrange the loan and you’ll make payments directly to them.
Second-Chance Car Loan
Second-chance car loans are designed specifically for people with bad credit, also referred to as subprime car loans. This is helpful as a second option if you’ve been declined by a regular lender.
Some dealerships may finance the loan themselves or work with subprime borrowers. While these loans will have higher interest rates and fees, you’re almost guaranteed to get approved.
5. Check Auto Interest Rates and Shop Around
Some auto loans are better than others. It doesn’t hurt to shop around. The credit bureaus give you 14-45 days to shop around for loans. Instead of multiple inquiries that hurt your credit, the bureaus will only count these as one inquiry.
Before applying, look online for the latest average auto loan rates. The loan rate will affect your monthly payment and the total price of the car you can buy.
6. Get Pre-Approved
To better prepare for the auto loan process, consider getting pre-approved by a bank or credit union. The bank or credit union will look at these factors to determine if you qualify for a loan:
- Credit score
- Credit report
This will also help you determine the amount you’ll qualify for. By taking this step early on in the loan process, you can save time and avoid any potential hurdles down the road.
7. Make a Larger Down Payment
Your credit history and credit score will affect the car loan you can get and a high-interest rate will make it even lower.
Making a bigger down payment can offset the interest, taxes, and fees. You’ll also likely have a bigger selection of vehicles to choose from.
It’s not unusual for lenders to ask for a bigger down payment. A higher down payment means:
- You borrow less so it’s less of a risk to the lender.
- A more reasonable interest rate, which can save you money.
If you have bad credit, you may want to save as much money as possible for a higher down payment. This may also make it easier to get approved for financing.
8. Get a Cosigner
Another option if you’ve been declined is to get a cosigner. A cosigner is someone who will take financial responsibility for the loan if you stop making payments. They can help you qualify if you don’t meet income or credit score requirements.
How a Car Loan Affects Your Credit
A car loan can affect your credit positively or negatively, it all depends on how you repay.
Consistent and on-time car payments will be recorded and added to your payment history, which accounts for 35% of your FICO® Score. Over time, it will improve the overall health of your payment history and in turn, your credit score.
If you miss too many payments, it could result in the lender repossessing your car. Luckily, when you qualify for a car loan but have a high-interest rate, you can continue building your credit. Once you’ve made on-time payments for about a year or so, you can look at refinancing your car loan for a better interest rate. This can also save you money.