5 Tips on Getting a Car With Bad Credit

Getting an auto loan with a less-than-perfect credit history can be difficult, but not impossible. Amidst tightening regulations and high interest rates, those with poor credit find it even harder to get a loan at a good rate. While finding a loan may take additional time and effort, you don’t have to scrape the bottom of the barrel. By using these tips and doing some research, you can get a new car with bad credit.

Know Your Score

Before shopping at bad credit car dealerships, do a credit check. According to FICO, scores can range from 300 to 850—and anything below 580 is considered less than optimal. FICO scores are based on several factors, including amounts owed, payment history, and credit history length. Scores can be negatively affected by:

· Late payments.

· Spending too much of your available credit.

· A lack of credit history.

When borrowers know their credit score, they can avoid applying for loans with higher rejection rates—and find lenders that work with people in their credit range.

Do Your Homework

A new car is a sizable investment, and preparation will keep you from being caught off guard when negotiating the price. Those with bad credit are typically offered loans at high rates. If your score is 500 to 600, Experian says you’ll pay between 13% and 19%. If you’re buying a new car, research its KBB or Kelley Blue Book value; for new cars, the MSRP or manufacturer’s suggested retail price is the number to focus on.

Save Up to Put Money Down

Before applying for an auto loan, know how much you can afford to pay each month and what APR (annual percentage rate) you’ll pay based on credit scoring. Finance experts recommend paying no more than 10-15% of your monthly earnings.

Saving for a bigger down payment will reduce your monthly bill, and it will also improve your approval odds if your credit is less than stellar. Down payments offset high interest rates and lower loan-to-value ratios, helping you qualify for more favorable .

Prove That You Can Afford It

Lenders consider credit scores, but they also look for signs that you can make on-time payments. While timely payments are a great sign, repossessions won’t work in your favor. Auto lenders typically ask for documentation of:

· Income sources: Pay stubs and disability/child statements are used to document your ability to pay on time.

· Debt to income ratio: Lenders look at borrowers’ debt to income ratio, or their monthly bills divided by their gross pay. If your ratio is above 50%, it may be harder to get a loan.

· Credit usage: If you have cards and loans, how much of your credit is utilized? Most lenders want to work with those using less than 30% of available credit.

· Payment history: Your payment history is a crucial factor in lending decisions, and it’s important to have explanations for late payments.

· Payment to income ratio: This is a reliable indicator of automotive affordability. Your payment to income ratio is determined by adding loan and insurance payments and dividing the total by your monthly income. The ideal payment to income ratio is under 20%.  

By proving that you can make on-time payments, you’ll increase the chances of loan approval while getting better and a lower interest rate.

Focus On Loan Instead of Monthly Payments

Low monthly payments are often used to lure buyers, and they look great on paper—but there’s a catch. These loans almost always come with long , which means paying more for a vehicle in the long term. Bad-credit car loans come with higher fees and interest rates, which can add up quickly.

When looking for a loan, choose one with a low APR over the shortest possible term and be sure the monthly payment fits your budget. Here, preapproval and comparison shopping come in handy.

Bonus Tip: Shop Around and Get Prequalified

Once you’ve started shopping for an auto loan, don’t limit yourself to a single lender. It’s easier to find a car with bad credit by comparing loan products from sources such as:

· Credit unions and banks: If you’ve established a relationship with a credit union or bank, start there. Some institutions offer reduced rates and are more willing to approve car loans for bad-credit borrowers with banking histories.

· Online lenders: Some online lenders offer prequalification, which allows borrowers to see which they may get. Online lenders may consider details like education and employment history when you apply for an auto loan. While these details aren’t as important as others, they can still help you get a loan.

· Dealers: If you can’t get a loan from an outside lender, consider financing through a dealership. While most dealers have in-house finance departments, they typically offer higher-cost options. These loans are easier to get, but rates are less competitive.

· Buy here, pay here: A loan from a buy here, pay here dealership may be a good choice if you cannot find a loan anywhere else, but it’s important to tread lightly. These loans are easier for bad-credit borrowers to get, but interest rates are well above average.

The easiest and most effective way to simplify the process is to shop around. Prequalification allows you to eligibility and before applying, saving time and avoiding unneeded credit checks that can affect your score.

Once you’ve shopped and prequalified with several lenders, compare their rates to find the fairest before submitting documentation and getting preapproved. While preapproval requires a hard credit pull, it gives you additional leverage when it’s time to negotiate.

Our Take

Getting an auto loan with bad credit is tough, and borrowers often face predatory practices and unfavorable . Thankfully, research, preapproval, and a big down payment can help you get a better deal, as can comparison shopping and credit knowledge. Once you find the right loan, on-time payments will boost your score and help you get better the next time around.

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