How to Finance a Car With Bad Credit in 6 Steps
August 7, 2019
If you’re looking for a new car, one of the first things you need to do is figure out how you’re going to pay for it. This can be more complicated and tricky if you have a low credit score.
Luckily, there are ways to figure out what you can afford. Below are six helpful steps on how to finance a car with bad credit:
- Understand your credit
- Calculate your budget
- Plan for a down payment
- Figure out the length of the loan
- Shop around for the best rates
- Consider a cosigner
Step 1: Understand Your Credit
One of the first steps to financing a new car is understanding your credit. A low auto credit score doesn’t mean that you won’t find financing. There are a lot of lenders who may be willing to work with you if you can prove that you have a steady income.
Keep in mind, if you do qualify for an auto loan but have a low credit score, your interest rate and monthly amount is likely going to be higher.
You can also try refinancing the loan later on. This will give you time to make on-time payments and show you’re trustworthy. It will also give you time to work on improving your credit. Refinancing might get you a better interest rate and save you money.
Dispute Any Errors
It helps to know your credit score but you should also pay attention to your credit reports. You can request a free credit report once a year. Once you get your credit reports, go through them to make sure everything is correct.
About 20% of Americans have found errors on their credit reports. Spot credit report errors before buying a new car, so you can dispute them. If you’re successful and the errors are removed, you may put yourself in a place to qualify for better loan terms.
Step 2: Calculate Your Budget
Besides understanding your credit, it’s also important to understand your budget. The last thing you want to do is buy a new car and then realize you can’t afford the monthly payments.
The price of the car may seem manageable but when you look at the loan amount you qualify for, the monthly interest may run up your monthly payment. There are also other costs to consider like car insurance, maintenance, and gas.
You may think you can afford an extra $300 or $400 a month to pay for your car. It’s a good idea to make sure of this by calculating your monthly expenses and considering how much more you can actually afford.
Try to come up with a figure that includes as many expenses as possible so that you can come up with an accurate figure.
A great way to calculate your loan with your budget is to use an auto loan calculator. By filling in your credit score, the loan amount you need, and what state you live in, you can find averages of just how much you could pay a month.
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Step 3: Plan for a Down Payment
If you anticipate buying a new car in advance, you can put aside money for a down payment. When you make a down payment, it can be easier to get approved for a car loan, even if you have bad credit.
A bigger down payment can also lower your interest rate, the term of your loan, and your monthly payment. If you know you want to buy a new car year from now, putting $200 away for 12 months gives you a $2,400 down payment.
Step 4: Figure Out the Length of the Loan
Work into your budget how long you plan to finance your car. Car loans can be as long as 84 months, which is seven years. You can opt for a shorter loan term length, but your monthly payments will be higher.
If you have bad credit, a shorter-term loan may be a good choice if you can afford the higher monthly payment. This is because you’ll likely have to pay a higher interest rate. A shorter loan period will save you money on interest in the long run.
Step 5: Shop Around for the Best Rates
Once you understand your credit and your budget, it’s time to start shopping for your new car. Before you head to the dealership, start looking at different lenders.
- Start at a bank or credit union you have a relationship with: If you have a good relationship with your financial institution, they may be more likely to approve you for the loan.
- Look up different lenders online: Not all lenders are created equal. Take your time to shop around. Compare rates and see what types of auto loans you may qualify for based on your credit score and how much you want to finance.
- Get pre-approved before you visit a dealership: This way, the salesperson can know what kind of car to offer you. Even if you aren’t pre-approved, dealerships work with banks and may be able to help get you approved for a loan.
- Don’t jump at the first offer you receive from a lender: While you probably know that too many hard inquiries can damage your credit, this isn’t the case with applying for loans. If you apply for multiple loans within a period of 14-45 days (depending on the credit scoring model being used), multiple credit inquiries won’t hurt you since credit bureaus understand you’re looking for the best deal possible.
Step 6: Consider a Co-signer
If you really need a car but can’t get approved, you may be able to still get the car. In order to make this happen though, you’ll need a co-signer.
A cosigner is someone who takes financial responsibility for the loan with you. If you don’t have a good enough credit score or your income isn’t high enough to be approved, a cosigner can help you get approved.
If you stop making monthly payments, your co-signer is then responsible for them. If neither of you makes the payments, both of your credit scores will suffer.
A cosigner should be someone you trust, such as a family member or a really close friend. Getting a cosigner is a great option for getting approved for a car loan or getting a better interest rate. If you have bad credit, this may be an option to consider. If you make your payments on time, both your credit scores may even improve. And you may be able to refinance later on to release your cosigner from financial responsibility.
Check If You Qualify
If you’re looking for a way to finance a new car, there are ways to be smart about it. Make sure you understand your credit and your budget. It’s also a good idea to shop around for the best loan possible.
If you have bad credit and want to purchase a car, give the credit specialists at Lexington Law Firm a call today. With over a decade of experience, we’ve helped clients remove millions of negative items from their credit reports that are unfair, inaccurate, and unverifiable. Call today for a free credit consultation to see if we can help you qualify for a new car.