Read these 11 Auto Financing with Bad Credit Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Auto Loans tips and hundreds of other topics.
If the need for another car is looming, there are things you can do to ready yourself to apply for an auto loan. If you have bad credit and have a few months to spare before applying for an auto loan, there are a few things you should do to before applying which may help you get a better interest rate and better loan terms.
You should first be sure to get a copy of your credit report to make sure you know exactly what is listed. If there are accounts on the report which are in error, you should report them and try to get them removed prior to applying for the auto loan. Also take a look to see if there are any delinquent accounts which can be brought up to date before you apply for your auto loan. Although this won't raise your credit score immediately, given a few months this may raise your score enough to where you are eligible for a better interest rate on a car loan. If you have the resources, try to stockpile some cash into a savings account to use as a down payment. The larger your down payment, the better your chances will be of getting an auto loan.
When looking around to purchase a car, buyers should first consider shopping around for a loan. Even buyers with bad credit should not simply rely on the dealership to find suitable financing. Bad credit auto loans are offered by many lenders, and just because a person has bad credit it does not mean that they should not take the time to find the best deal possible. Before heading to the dealership, you should always contact your bank or credit union to see if they are willing to finance you.
Not all banks and credit unions have auto loan products for people with bad credit, but you will never know until you try. You should also take the time to check out all the available bad credit auto loans with other lenders. Using a website like BankRate.com, you can get a quick look at several lenders that are willing to finance cars for people with blemished credit in addition to being able to compare all the various interest rates they offer. After securing financing, head to the dealership and enjoy the experience of being a cash buyer. There is less paperwork and less haggling, and in many cases the interest rate is much lower. If the dealership is actually able to find you a lower interest rate, then you should take it.
Getting approved for new credit after discharging a bankruptcy can seem like a difficult task, but with so many lenders specializing in providing auto loans after bankruptcy it should actually be a relatively simple task.
The reason why lenders provide auto loans to people with recently discharged bankruptcies is simple; the borrowers are unable to declare bankruptcy again for several years. This means that the auto loan debt cannot be dissolved and must be paid as agreed. Consumers looking for auto loans after bankruptcy can certainly expect to pay higher interest rates and have less attractive loan terms than consumers with no bankruptcy in their history, but this does not mean that consumers with discharged bankruptcies should simply accept any interest rate regardless of how high it is. Even with bad credit, borrowers should shop around for the best interest rate.
There is validity to the idea, however, that perhaps getting an auto loan directly after a discharged bankruptcy is not a good idea to begin with. It is all too easy to head right back down the same path to out-of-control debt. Perhaps the best tip for people seeking auto loans after bankruptcy is to simply save up some cash to buy an unattractive yet functional car until they can afford to get something nicer.
Auto loans are not reserved only for people with excellent credit. Although it is true that people with stellar credit are going to get a lower interest rate than people with bad credit, there is always a way to obtain financing. Borrowers with bad credit, however, can certainly expect to pay higher interest rates and to possibly provide additional documentation or even a co-borrower in order to obtain an approval. Even though these additional requirements may seem like a hassle, they make sense.
Lenders are taking a bigger risk when they extend credit to people with low credit scores, regardless of the reasoning behind the low scores. It doesn't matter if your credit score is low because you went through a messy divorce, or if it's low because you were reckless with credit in the past. Either way, you will need to accept a higher interest rate until you have built your credit back up and your score increases. Once you have proven yourself able to make consistent payments on time, it should not be difficult to obtain a lower interest rate on your next auto loan.
In the realm of bad credit and shopping for a new car, auto financing represents the best alternative. Unlike the used car loans geared for people with bad credit, approval and ideal leasing opportunities necessitate a decent credit score. Remember that a down payment and monthly charges of a leased vehicle will be more costly than financing a new one. Nevertheless, bad credit is usually tantamount with a new car lease rejection or harsh terms.
For the financially challenged or people with bad credit, there are a few alternatives to car financing with bad credit. Individuals who do not qualify for a low interest car loan should steer clear of a car dealership. The ultra-low rates offered by dealers are usually marketing ploys.
Low interest rate financing targets consumers with a permanent address, a stable job history coupled with a good credit standing. Unfortunately, customers with a tarnished credit rating may be limited to high-risk financing from a used-car dealer who specializes in sub-prime financing (unconventional loans). Moreover, certain sub prime car financing may expand into bills where the consumer owes more than the value of the car.
For the indebted, 'buy here-pay here financing' is a growing new trend. These high interest rates for used cars can serve as the only alternative for people who require transportation but do not qualify for conventional or prime financing terms. Additionally, high-risk buyers or poor credit consumers have to meet a higher down payment requirement. In many cases, the down payment for a lower-end used car usually covers the full amount of the vehicle, leaving the remainder of payments as total profits for the car dealer.
For some people, having bad credit is a relatively new experience. Unexpected occurrences such as being laid off from a job or medical problems can turn a person's good credit into bad credit if payments are not made in a timely manner. If you are in this position, but still have a home equity account open from when you were able to make your payments without a problem, you may want to consider using the equity line to purchase a car instead of obtaining a new loan. Of course, this tactic must be approached with caution.
If at all possible, you should avoid using credit if you are in the middle of a financial crisis, but for some people it simply isn't an option. Just remember that you are borrowing against the equity in your home. If you can't keep up with the payments, you will lose your house. If you have no other choice than to purchase a car and need to use an existing equity line, you will wind up paying much less in interest than you would with a car loan obtained with bad credit.
If you have bad credit and you are shopping around for auto financing, you have probably noticed that not every lender is willing to grant financing to applicants with low credit scores. This may have led you to check with lenders that you are not particularly familiar with, or that you have never even heard of before. You need to take care to not get talked into paying extra fees and a higher interest rate than you need to.
Be on the lookout for things like application fees, prepayment penalties, and additional insurance such as life insurance and disability insurance. Some lenders who finance people with bad credit will add these types of things to auto financing to make even more money from the transaction. No matter how low your credit score, you can probably find bad credit auto financing which does not include all these extras. You cannot expect to obtain financing with a low interest rate when you have bad credit, but you should be able to find an auto loan which does not include plenty of extra fees.
Not everyone obtains poor credit from being frivolous with their credit cards. Sometimes instances of injury, divorce, or unemployment are the culprits which cause poor credit, and it can be difficult to rebuild credit after something like this occurs. Just because you have poor credit, however, does not mean that you need to accept outrageously high interest rates, ridiculous terms, and additional insurance coverage tacked on by the lender. You should never feel grateful to a lender who is granting you a loan if they are doing so just to take advantage of your situation.
Look closely at all the documents you receive when getting approved for poor credit auto loans. Does the interest rate near or exceed the twenties? Is the term of the loan stretched out long past sixty months? Is life or disability insurance listed on the loan, even though your loan representative did not discuss this with you? These should be red flags that you are not getting the best loan possible.
You should know that there are highly reputable lenders who will indeed do business with borrowers with poor credit scores. Yes, you will pay a higher interest rate than you would if your credit was better, but these lenders will not take advantage of you. Just because you have poor credit, it does not mean that you should allow yourself to get taken advantage of.
Having no credit can make it difficult for consumers to obtain car loans. It is a tricky situation: the lender wants to see a credit history, but the borrower can't get anyone to finance a loan to begin with. Borrowers with no credit history will have a better chance of getting financed for a car loan if they have a job with a steady income and have some savings in the bank.
Auto lenders understand that everyone needs to start somewhere, but things like a steady income and some savings in the bank tip the scales in favor of the borrower as being a good credit risk. Applicants who have no credit history, no savings in the bank, and who have sporadic work histories are less likely to obtain financing. When obtaining your first auto loan you should expect to pay a higher interest rate than you would if you were a seasoned borrower. You need to prove to the auto financing company that you have the capability and intention of making timely payments each and every month, and until you can do that it is unlikely that you will be able to expect lower interest rates. After you have paid on your auto loan for several months, however, you can apply for a refinance at a lower interest rate and as long as you maintain an excellent payment history with all your credit you may never have to pay high interest rates ever again.
There are ways to get lower interest rates on car loans, even if the borrower has less-than-perfect credit. Don't accept the very first loan offered to you. It really pays to shop around a little to find the best interest rate. You should additionally consider paying the car loan back using an automatic deduction from your checking account. Oftentimes this will result in a lower interest rate as long as the automatic payment is maintained.
If your credit is exceedingly bad, you may want to consider having a co-borrower on the loan, preferably someone with outstanding credit. Having a co-borrower is not something that should be entered into lightly, however, because if you default on the loan for any reason, the co-borrower becomes legally liable to make the payments. That means if your father co-signs for you and you later lose your job and are unable to make payments, he needs to make the payments even if he never drives the car. Even though having a co-borrower can result in lower interest rates, you need to decide if it is worth it. In some cases, it may be better to simply accept a higher interest rate so you don't need to involve someone else in the loan.
|Jennifer Mathes, Ph.D.|