Though buying a new car with poor credit may seem impossible, financing options exist that offer reasonable interest rates to those with bad credit. From traditional lenders and credit unions to online lenders offering auto financing packages for those in poor financial standing.
To maximize your chances of getting the best offers, take steps to improve your credit before shopping.
Don’t Buy the Cheapest Car You Can
Your choice of car can have a major effect on both your credit score and financial wellbeing. To protect yourself against repossession and other negative outcomes, try not to take out loans with monthly loan payments that exceed 20% of your take-home pay.
At times like these, you may require a used or certified pre-owned (CPO) car as an alternative. Many such models are only a few years old and come equipped with manufacturer warranties to give you peace of mind.
Keep a keen eye on the value of your current car, which could be traded-in at a dealership or sold privately for cash. By saving this money for down payments or future loan payments, it could help save yourself more in interest over time.
Based on your credit circumstances, it may be advantageous to apply for loan preapproval prior to visiting a dealership. This will give you a clearer idea of which vehicle fits within your budget as well as potential interest rates that could arise, giving you a better sense of which car would best meet your budget needs.
Use online pricing guides like Kelley Blue Book and Edmunds to see what the average car price in your area is, so as not to overpay and focus on negotiating the best possible deal with sellers. Be prepared to explain any credit issues on your report that have since been corrected – doing this may enable you to negotiate lower interest rates from lenders.
Don’t Go to a Dealership
Before visiting a dealership with poor credit, it is essential that you conduct sufficient research. A dealer may appear to offer an irresistibly attractive deal; however, their profit often stems from markups on interest rates they arrange. If possible, seek financing elsewhere than through the dealership itself.
Lenders often view those with poor credit as risky investments, so they may decline your application for financing. Don’t take this personally; an experienced lending professional just doesn’t believe you have the ability to repay a loan. Finding a co-signer may increase your chances of approval; they will sign the car loan agreement along with you and vouch for your ability to repay. While taking on this responsibility can be daunting, this step can help build up your credit.
Keep in mind that having a low credit score can result in higher auto insurance premiums. Luckily, most state laws allow insurers to offer different rates based on individuals’ credit scores; thus enabling you to find better deals by shopping around with various car insurers.
When purchasing a car, be mindful of how much of a down payment you can afford and work on improving your credit rating prior to applying for loans. Doing this could save thousands in interest! In addition, make smaller down payments when purchasing used vehicles as this may be easier with lower credit scores.
Don’t Try to Use a Credit Card
Poor credit can make it more difficult to secure loans, particularly if you’ve had trouble paying bills on time in the past. Late fees may accrue and your score could take a hit that makes future loans harder to come by or even cell phone contracts or employment more challenging to attain. Therefore it is vital that you invest the time into improving your score in order to avoid potential negative consequences and keep borrowing responsibly in order to build or rebuild it in order to protect future opportunities.
Lenders also consider your debt relative to total available credit and how long your accounts have been open. As a general guideline, keep your credit utilization below 30% by keeping a low balance on each card without closing accounts as this will help ensure a stronger payment history for you.
When shopping for a new car, it’s advisable to compare lender options. Doing this can help ensure that you find a loan with the lowest possible interest rate suited for borrowers with your credit score. However, be cautious not to commit too early as that could result in losing out on better deals elsewhere.
If a dealer displays signs that declare they “finance everyone,” run away immediately! Such lenders typically offer loans with very high interest rates, often much more costly than those available to borrowers with excellent credit scores.
Don’t Overextend Your Budget
Those with poor credit should take care not to overextend their budget when searching for a vehicle, as overextending could leave you in an unsustainable financial hole and reduce future loan opportunities.
Before making your purchase, try saving up money for a down payment and improving your credit score to reduce interest rates and save thousands over time. This could make all the difference!
However, that doesn’t preclude you from applying for a car loan – there are lenders and dealerships who specialize in offering loans to those with poor credit at higher interest rates; it would be prudent to conduct some online research prior to visiting any dealerships.
Credit bureaus typically use several factors when assessing an individual’s creditworthiness, including account tenure and new accounts opened in a short period; debt-to-income ratio; etc.
Establishing new accounts may signal to credit bureaus that you are experiencing financial difficulty, which will significantly lower your score. You should also take care to keep all existing accounts up-to-date and accurate.
Review your credit report regularly. Experian(r), Equifax(tm) and TransUnion(tm) each provide one complimentary report annually that should allow you to identify errors such as accounts that do not belong to you, negative marks on debts you’ve paid off or other irregularities that might be harming your score.
Don’t Apply for Financing Too Early
Poor credit can make loan approval and financing more complex and take longer, often necessitating more income documentation and larger down payments than would otherwise be expected, along with likely incurring a higher interest rate.
Before heading into any loan office or dealership, it’s wise to conduct research on lenders in order to be prepared. Online research can reveal much about requirements and interest rates of various lenders; however, you should speak directly with lenders in order to gain more personalized insight into what to expect.
Debt-to-income ratio, or your outstanding balances, is one of the main determinants of your credit score. To keep this number as low as possible, pay down existing debts with high interest rates as soon as possible and avoid opening new accounts prior to purchasing a car as credit bureaus will view this activity as suspicious and it can lower your score significantly.
If none of the suggestions above work for your situation, a second chance lender who offers special loan programs for individuals with poor credit could be an option to consider. Although their rates may be higher than traditional auto loans, these second chance loans could help build your credit history and demonstrate you can be responsible enough to take on further loans in the future.