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How to Get a Car Loan with Bad Credit: Complete Guide

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For most of us, a car is indispensable. Getting around town when there’s limited public transport is a chore if you don’t own a vehicle.

A car is one of life’s most significant high-ticket items you can buy, and many of us don’t have the funds available to purchase one for cash.

If you’ve got your heart set on purchasing a new or used car, then the chances are that you’re thinking about financing the deal.

Do you know your credit score? This figure has a lot to do with whether or not you’ll be able to receive the financing you need to get behind the wheel. If after looking at your FICO score, your dreams start to dissipate into dust, then it’s time to look at other options.

Fortunately, there are ways and means to finance your car, even if you have bad credit.

Do You Know Your Credit Score?

Before we get started on strategies that can help you buy a car, it’s essential to check your credit report. Your report is available from the three major credit bureaus, Experian, Equestrian, and TransUnion. All three of these bureaus let you access your credit report once a year for free, so it’s time to take advantage of this offer.

Log on to one of the websites, and it will prompt you for some basic personal information. The system then generates your report in a matter of seconds. It will show if you have any outstanding creditors that sent your account to collections. The report also displays any judgments against your name.

If you have either collections or judgments filed against you with the credit bureaus, it’s going to affect your credit score to the downside severely. The report will also show you your FICO credit score, issuing a number between 300 and 850.

Lenders consider FICO scores above the 700-mark as good, and you won’t find it hard to finance a vehicle. However, if you have a credit score that’s under the 600-level, then you can expect most lenders to deny your application for vehicle financing.

How to Check Your Credit Score for Free

Read: 5 Ways to Easily Check Your Credit Score for Free

The Impact of a Car Loan on Your Credit Score

It’s also important to note that financing a vehicle also affects your credit score. If you do manage to receive an auto loan from a lender, then it’s in your best interests to make your monthly payments on time. Lenders report your payment history to the credit bureaus, and it accounts for approximately 35-percent of your total credit score.

Therefore, if you make your monthly payments on time, you can expect your credit score to move upwards. However, if you miss payments or pay late, then your score will start to turn to the downside.

What You Need to Do Before Applying for Vehicle Finance

Implement the following steps to improve your credit score and put you in a place where you are eligible for a vehicle finance facility.

Improve Your Credit Score

If you’ve finished checking your credit report, and find that your FICO score is under the 680-mark, then you should consider implementing a strategy to reduce your debt and improve your financial situation. Create a list of all of your outstanding creditors, and rank them from the most substantial debt to the smallest. Then, rank the lender based on the amount of APR interest they charge on the account.

Pay off the lenders with the highest APR first, as this is as good as saving money. By paying off your expensive creditors, you’ll have more money left at the end of the month, allowing you to save toward a down payment on your car.

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If your Credit Score is below what’s needed, try a credit repair company like Lexington Law to improve it. Here’s our review of their service.

Look to Decrease Your Debt-to-Income Ratio

Your debt-to-income ratio, (DTI), describes the amount of outstanding debt you owe to lenders versus your annual income. For an optimal financial position, your DTI should be in the neighborhood of 30-percent.

In other words, if you earn $60,000 per annum, your total debt should not exceed $20,000. If taking a car loan will increase your ration past this threshold, the lenders are less likely to approve you for an auto loan.

Try to decrease your debt load to under the 30-percent ratio, and give yourself some room to add in the annual; cost of your auto loan as well. Credit cards are often the culprit responsible for an exceedingly high DTI, so do whatever you can to reduce your credit card debt as quickly as possible.

Another challenge facing credit card owners is the fact that many of them decide to max out their cards. Lenders look at credit card facilities in the same manner as your total DTI ratio. If your card facility has a limit of $10,000, try to keep your outstanding debt below 30-percent, and closer to the 20-percent mark if possible.

Managing your debt level is an essential factor in determining your credit score. Low DTI ratios show lenders that you are responsible with credit.

In most cases, it only takes a few small adjustments to your spending habits to successfully implement these changes and improve your credit score into the 700s.

Avoid “Hard Inquiries”

If you head down to the dealership and try to take a chance on applying for a vehicle loan, the finance manager will run your details through the credit bureaus to check your credit score, in what’s known as a “hard inquiry.”

Hard inquiries deduct points from your total credit score. So, if your current FICO rating is in the 680 to 700 range, your application for finance could ruin your chances of obtaining a loan. To make matters worse, you may decide that you’ll have better luck with another dealership, and as the next financier runs your credit report, you score drops even further.

If you don’t get any success with your first attempt at finance, ask the dealership for a reason for their denial. If the dealer tells you that your FICO score is too low, don’t go and try your luck with other dealers, because you won’t be able to buck the system.

Instead, focus on ways to bring your credit score up to a healthy level that suitable for finance. Ask the dealership what they would need from your FICO score to accept your loan application, and then set that target as your new goal.

What You Need to Do If You’re Desperate

If you need a car immediately and don’t have time to improve your credit scores before applying for an auto loan, here are some alternatives that might help.

Research Bad Credit Lenders

If you have no luck with applying for finance with top-tier lenders, then it’s time to look at other options. Unlike the personal loan and credit card markets, finding a lender willing to take a chance on you is much easier.

There are hundreds, if not thousands, of lenders that service people with bad credit in the automotive market. At present, there is a massive oversupply of second-hand vehicles across America. The enormous influx of people leasing brand new cars led to substantial growth in second-hand car stocks looking for a new owner.

As a result of increases in stock, many lenders are willing to take a chance on you, even if you have bad credit. Search online, and you’re bound to find plenty of options available.

However, before you click on the first result in your Google search, there are a few things you need to know before committing to a loan with a bad credit lender.

First, because you have bad credit, the financer knows that you are desperate and willing to pay a premium interest rate on your deal. As a result, the lender will often offer you an auto loan with unfavorable APR interest. Annual Percentage Interest on a vehicle loan is typically between 3 and 4-percent if you have good credit.

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Read: Zoca Loans Review: Installment Loans for Bad Credit Borrowers

However, because you are in a tough financial position, the lender will often boost this APR in the hope that they can squeeze more profit out of the deal. As a result, some bad credit lenders will charge as much APR as you would expect to pay on a credit card facility, ranging from 17 to 24-percent, depending on your FICO score.

Paying a high APR rate can dramatically increase the cost of your vehicle, as send your monthly payment to the moon. Here’s an example;

If you have a good credit score between 661 to 780, you’ll like be able to wangle a deal with a 4-percent APR. In this case, your monthly payment on a 36-month vehicle loan would be $531.43. With a $2,000 down payment on the car, you can expect the rest of the total costs involved to be $19,131.48, and the total amount of interest due at $1,131.48.

However, if you have a FICO score between 501 to 600, and use the same $2,000 down payment, then the same vehicle would cost you a monthly payment of $641,75. This deal means that you pay a total of $23,103.00 over 36-months, with interest accounting for $5,103.00. In this case, the interest costs are over 25-percent of the vehicles retail value, and we all know that you’ll get far less for your car when you want to sell it after a few years.

You’ll need to assess if the cost of finance is worth owning the car. If you can’t justify this price to yourself, then it’s a good idea to walk away from the deal.

Increasing Your Down Payment

The thought of spending vast sums on interest over the loan term may leave your head spinning. However, if you decide to increase the size of your down payment, the lender may choose to reduce your APR. As a result, you’ll have less interest to pay on the outstanding balance, and it’s at a cheaper rate as well.

If you’re willing to put a higher down payment on the car, the lender may also be enticed to take the deal, even if you have a bad credit score. This strategy also saves you on interest payments over the loan term, making the cost of the car seem reasonable.

Find a Co-Signer

Students and young people entering the workforce need a car to get to school or work. However, with no credit history, you find yourself in the same position as someone with bad credit. In this case, ask your parents to co-sign the loan.

Lenders are happy to make deals for customers with no credit or bad credit history, as long as they can mitigate their risk. By having a co-signer sign off on the financing, the risk falls on their shoulders, not yours.

If you default on the payments, the lender repossesses the car and goes after the co-signer for the outstanding balance.

In Closing – Look at Vehicles You Can Afford

We all dream of owning that used BMW 3-series that’s still in immaculate condition. Rolling up to your friend’s house in your dream ride may fill you with a sense of pride, as you revel in your friend’s jealousy.

However, do you really need that BMW? How does having a luxury vehicle serve your current financial position? Sure, driving around town in your BMW may make you feel like a king – but that won’t last forever.

When your first few monthly payments start to roll in, you can bet that the novelty will wear off, leaving you with plenty of buyer’s remorse. You’ll eventually regret making a poor financial decision, and it’s a hard lesson to learn.

Instead of purchasing that German luxury car you’ve dreamt about for so long, consider something cheaper. A used Honda or Toyota may not be the stuff dreams are made of, but you’ll thank yourself for your financial prudence when the monthly payments start coming off your account.

It’s also important to note that lenders are looking for you to make a mistake. Unlike real estate, cars are easy for banks to repossess, and they won’t hesitate on pulling the plug on your loan. Watching someone haul away your vehicle after you’ve paid off half of it is a traumatic experience for anyone to handle.

The lender turns around and re-sell the car for the same price, doubling their profits, while you get stuck with a collection notice or judgment on your credit report, and no vehicle to show for your previous payments. Can you imagine having to pay the lender, even though they repossessed your car?

Buy what you can afford, not what you want. Like the Rolling Stones said, “life doesn’t always give you what you want, but it gives you what you need.”


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased