Owning a vehicle is a necessity in this modern world. From attending work responsibilities to running errands and even dropping the kids off at school, a reliable means of transport makes a huge difference in convenience. However, securing funds to buy a car is impossible for many people, especially those with a lower credit score.
Bad credit car loans are meant to assist people in need by providing loans that allow them to finally buy a car. Although terms vary for these types of loans, there is certainly help out there that makes car ownership possible. In this article, we will cover everything you need to know, from getting a car to understanding the different types of loans available and tips that improve your chances of getting approved.
Understanding Bad Credit –
What is Bad Credit?
Banks often assess your credit history to determine if you will get approval for a loan. This history is summarized using a number, which in most cases is a FICO score that ranges from 300 to 850.
Good Credit: 670 and above
Fair Credit: 580-669
Bad Credit: Below 580
Everyone is liable to make mistakes occasionally, but in this particular context, having high loan defaults, unserviced payment obligations, and an exorbitant credit card balance all contribute to having a low score.
How Bad Credit Impacts Car Loans
Lenders assess credit scores to determine lending risks. If you’re flagged under ‘bad credit’, these challenges might arise while seeking car financing:
- High Interest Rates: Borrowers with low credit scores usually pay higher interest rates, increasing the loan’s overall cost.
- Restricted Loan Terms: Lenders may impose shorter repayment periods, leading to higher monthly payments.
- Limited Options: Acceptable credit score ranges can be hard to come by, meaning lenders are highly selective with their terms, restricting you to subpar lenders and alternate financing avenues.
This information can equip you to form viable, employable strategies when seeking car loans.
How Bad Credit Borrowers Get Car Loans
Even with bad credit, options exist to assist people with complex credit histories.
Car Loan Categories for Individuals with Bad Credit
- Subprime loans: With a defined low credit score threshold, these loans cater to specific borrowers.
- Secured loans: These types of loans allow the borrowing of a vehicle, which lowers the lender’s risk but means losing the car if the borrower is unable to pay back the loan.
- In-house (buy here, pay here) financing: A car dealership funds these loans directly. Such loans are not difficult to obtain, but they usually charge higher rates than bank loans.
Loan period and interest rates
- Interest Rates: Individuals with bad credit often have to pay a much higher interest rate than the average, starting from 10% and reaching over 20%. This adds a substantial markup to the overall loan price.
- Schedule of repayments: Many banks offer shorter terms of 3 to 5 years, which leads to higher monthly fees and strains the borrower’s monthly budget.
Knowing these things enables better planning on which kind of loan is most convenient financially.
How to Apply for a Car Loan With Bad Credit
Step 1: Check Your Credit Score
The first thing you should do is check your credit report. Look for mistakes or errors you can dispute to improve your score before applying for a loan.
Step 2: Determine Your Budget
Realistic budgets should be set with down payments and monthly payments in mind. Consider your monthly payment capacity and how much you can afford to pay as a down payment to reduce your borrowing needs.
Step 3: Find Lenders Who Offer Bad Credit Auto Loans
Lenders and credit unions that specialize in bad credit auto loans are your best bet. Check reviews and compare them for their interest rates and loan terms.
Step 4: Get Pre-Approved
Preapproval tells you how much you will most likely be able to borrow and helps you during negotiations at the car dealership.
Step 5: Negotiate and Compare Offers
Do not accept an offer on the spot. You should be able to negotiate for lower interest rates and better terms, and multiple offers should be weighed before making the final decision.
Tips to Improve Odds of Approval
Increase Your Down Payment
Putting in more money as a down payment directly increases your chances of getting the loan and reduces the total amount needed to be borrowed. Less need equates to less risk for the lender.
Find a Cosigner
A cosigner with good credit will significantly increase your chances for approval and, better yet, low interest rates.
Strategies to Keep Your Loan Amount Low
Select a less expensive or used vehicle to keep the loan amount low. This increases the likelihood that payments will be affordable and improves approval chances.
Show Proof of Income
Bring forth documents like pay stubs and tax returns to provide proof of income, showing stable income and employment, which ensures lenders of repayment capability.
Avoid Applying with Multiple Lenders
Applying to multiple lenders within a short period can lead to an unnecessary spike in loan inquiries, which can harm your credit score. Pick loan-shoppable lenders wisely.
Bad Credit: Long-Term Steps to Fix It
If you are struggling with bad credit, it is recommended that you make efforts to improve it, which will ensure better loan terms in the long run.
Make all payments by deadlines: Paying bills before deadlines is one effective way that can significantly boost your credit score.
Cut Down Credit Card Balances: Aim to keep your credit utilization ratio below 30%.
Dispute Credit Report Inaccuracies: Identify errors on your credit report and dispute them to adjust the data.
Vary your credit types: Gradually, managing responsibly while having different credit types (personal loans, credit cards) can help improve your score.
Check Your Credit Consistently: Track your credit with free tools to monitor progress to avoid missing out on tracking unwarranted drops.
Having good credit will not only help in the future with auto loans but also provide you with additional financial benefits at more affordable interest rates.
Explore Your Options Today
While a bad credit score might feel like a prison sentence, it doesn’t have to keep you off the road completely. With some research and improving your financial behavior, increasing your down payment, or obtaining a cosigner, your chances of approval significantly increase, allowing you to secure a budget-friendly car loan.
Need some guidance? Check your credit score first, then begin researching bad credit auto loans to make a well-informed decision. Approach everything step by step, weigh all options carefully, and sprint away from lenders who offer risky loans.
The journey toward a better financial future starts now. Drive with confidence.
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