It’s no secret that the buyers with the highest credit scores get the lowest rates. But that doesn’t mean you can’t buy a vehicle with an average, or bad, credit score. While the process may not lean as heavily in your favor – less negotiating power, for instance – you can be approved for an auto loan. However, you will have to do more planning before you buy.
Check Your Credit Reports
Lenders will base your interest rate on your credit score, and low credit scores will mean that you will be offered a high interest rate. You may even be denied for a loan, depending on how bad it is. And your interest rate will significantly impact your monthly payment. It’s best, if you have the option, to wait as long as possible before buying a car to work on getting that score up. Even two or three months allow you to make an immediate impact on your credit.
For example, get current on unpaid debts. Continue to make at least minimum payments since late payments can destroy a credit score quickly. Pay more than the minimum when you can to get credit card balances as low as possible. Reach out to collections and settle those accounts – even if you agree on a payment plan. Check your score for errors. After all of these items have been addressed, your credit score will start to rise. There are plenty of resources online to get your credit score for free, and to learn where and why your score is what it is. Truliant even offers a No-Cost Credit Review, where we’ll sit with you and review your score, ways to improve it and ways to save.
Know How Much You Can Afford
Another great idea is to use an auto loan calculator to determine how much you can afford to pay for a new or used car. This will help you create a budget that you will be able to stick to over the years. The calculator will also help you determine how much you will be paying throughout the life of the loan. A huge key here, though, is to make sure the interest rate reflects what you’ll most likely qualify for. There’s a huge difference in your monthly payment at 5% versus 18%. As a result, you may need to reconsider your budget for the vehicle up front to accommodate the higher payment.
Plan to Make a Larger Down Payment
Often with lower credit, you’ll get an approval with stipulations. One of the most common for less qualified buyers is a large down payment. We get it – even $500 is a large down payment when you’re struggling to make ends meet. Knowing this up front will give the opportunity to save or secure a down payment before you’re caught off guard. The down payment allows you to contribute more towards the car so that you are borrowing less and, therefore, less of a liability to the lender. However, your monthly payment will be lower as well. In many cases, you will be asked to provide a 10% down payment with challenged credit.
Obtain a Loan With Shorter Loan Terms
If you are approved for an auto loan with bad credit, your lender will consider you to be a high-risk borrower. To lower the high price of this type of loan, you should look at financing over a shorter term. 36 months instead of 60, for instance. A loan with shorter terms will be less risky for the lender and you’ll pay much less in interest. Longer terms are more expensive, even though the monthly payment is smaller, because the lender will charge a higher interest rate. However, it’s important to note that a shorter-term loan will have a much higher monthly payment. Make sure that you are able to comfortably afford your payments before you sign the contract.
Find Someone to Co-Sign the Loan
A co-signer can be a sticky issue – as that person will be responsible for the loan if you can’t make payments to maintain their good credit. But, if you’re desperately in need of a vehicle, can make payments and a friend or family member is willing to co-sign for you, this is a great way to save a significant amount of money in interest.
Before you buy a vehicle, it’s often a good idea to get pre-approved at a financial institution like Truliant. The lender will examine your expenses, income and your credit report to determine if and for how much you qualify. With this option, you will know exactly what you can afford to purchase and what the terms will be before you shop for your new car.
Obtain Quotes from Several Lenders
Even though your credit is not ideal, it’s still a good idea to shop around. While you may not qualify for the lowest advertised interest rates, comparison shopping will yield some savings.
Understand Your Contract
Make sure there are no surprises in the contract. For instance, if you get approved, but at a high interest rate, you’ll want to make sure there are no prepayment penalties. Many auto loans, like Truliant, feature no prepayment penalties, so that you can pay down the loan faster and save money, or refinance later.
Car Dealers for Bad Credit
There are several car dealerships that specialize in buyers with credit scores below 600, and they will work with you to ensure that you are approved. The drawback is the fact that this option may be an expensive one with high interest rates and unfavorable loan terms, so choose this type of car dealer very carefully.
Please note: These also may not be reported to credit bureaus which will mean that even if paid on-time every time, there is no benefit to the buyer’s credit score making it harder to refinance for a better rate/payment in the future.
The bottom line when shopping for a vehicle when you have credit is to postpone the purchase and work on your credit unless it’s absolutely necessary to shop now. Either way, it’s important to shop around to get the best deal you can, even though a low credit score severely impacts your ability to negotiate or secure favorable terms. Finally, know that you have the ability to refinance down the road when your credit improves.