4 Steps to Get a Car Loan with Bad Credit
Are you looking to buy a car but have a bad credit score? Unable to get a loan from a trusted institution? Well, no need to worry since there are plenty of ways to deal with bad credit and still get a car loan approved.
We will show you how bad credit car financing works and four steps to apply for one. So let’s begin.
Check Your FICO Score
Before you deduce you have bad credit, it is essential to check your FICO score. Lenders judge borrowers based on their FICO scores, which typically range between 300 and 850 and are graded in the following ways:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Very Poor: 300-579
If your FICO rating is below 580 and falls in the fair or poor category, you will have to rely on bad credit car financing plans that typically come with more than 15%-20% APR on average. The percentage rate is a lot higher than what you would get with an Exceptional or Very Good FICO rating, typically ranging between 7%-10%. Hence, it is very important to clear all your standing arrears, dues, and bill payment and fix your credit score before you apply for a loan. It’s not worth incurring hefty interest rates for standing arrears that you have to pay one day or the other. However, if it’s an emergency and you need to have a car to go to work or run errands, plenty of institutions will offer you a loan. So, no need to worry about that.
Prove Personal Stability to the Lender
Before a bank or a lender approves a loan, they will look at several other factors, such as your monthly income and expenses. A loan will only be issued if you can make the new monthly car payments after clearing all existing debt obligations.
Moreover, your income and debt figures will also help the lender determine the interest rate, additional fees, or down payment. So before you reach out for a loan, make sure you total the monthly debt and compare it against the income to figure out how much you can afford to pay as installments.
Most lenders also look at how long you have been with your current employer and lived at your current address. It gives them a sense of security that you are doing well in your job and settled in. If you are on a continuous run, switching jobs or apartments frequently, you may be seen as a high-risk candidate, and the loan might get declined.
So, you will need to provide a few months’ paycheck stubs and proof of address.
Consider a Down Payment
Now, this is something most people with a poor credit history take lightly. We understand that you might not have the cash handy to initiate a downpayment at all times; however, it is always a good practice. Giving a downpayment, even if it’s a couple of hundred dollars, can help the lender approve you for financing and lower the upfront costs.
A large downpayment can also help lower interest rates or monthly installments. It also helps in creating a good image in front of the lender, ensuring you will pay the monthly installments on time.
Check Your Options
There are hundreds of reputed lenders, banks, and credit unions that will gladly offer you a loan despite your bad credit score. You don’t have to rely on a single lending source and accept their interest rates. Always remember that a car is collateral and secures the loan, so lenders have a low risk.
Furthermore, everything is online nowadays, so you can look for alternatives and choose the best one. You could also reach out to the bank or credit union you already have a relationship with. They might offer you lower interest rates because giving a loan would expand their service to you. Also, they can quickly give you a quote based on your credit score, income, and expenses by pulling out your records. And don’t forget to mention whether the car you are getting is new or used. That will help the bank narrow down the estimate to your preferences.
You can then compare the rates with other alternatives, such as the dealership, which typically ties up with partner banks to give you the loan.
However, if you can’t get a quote or a preapproval from the bank and need to rely on the dealership, carefully read each and every documentation before signing anything. Unlike banks, some auto lenders might not be regulated by the federal government, so take each step carefully. These unregulated lenders might charge exorbitantly high-interest rates putting you in a vicious circle of financial nightmares.
The safest thing to do in this case is to bring a co-signer to the bank or a trusted dealership. A co-signer can be a friend or relative who helps secure the loan when you have bad credit and also helps to lower the interest rate.
Last Words
Before you step into the dealership, you should keep in mind how much you can afford. The car salesman will always try to sell you a more expensive model and make it seem like you can afford it. However, if you want to be financially sound, you should check your current financial status and whether you can actually afford the monthly installments, besides the registration fees, maintenance costs, gas, and parking. Don’t get carried away by your emotions or the tendency to show off to your friends.
Furthermore, unlike houses, cars are depreciating assets, which means they start to lose their market value the moment you start driving them. You will never get the full value of your car back if you plan to sell it in the future, and on top of that, you now have a loan to pay off.
Know your limits and walk away if you can’t afford them. Don’t get carried away!