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The least expensive and potentially easiest way to buy a car with bad credit is to pay cash outright for it. That way, no one even needs to check your credit history, and you don’t pay interest expense of any kind.
However, that’s not a path everyone can take, especially with the rising costs of new and used cars. The average MSRP for a new vehicle in 2023 was $34,876, and used vehicles aren’t much cheaper. The average cost of a used vehicle in mid-2023 was more than $27,000.
Even if you have money saved up and can afford to drop it all at once on a car or truck, if you’re looking to build up your credit for the future, a cash purchase won’t help you with that. So, understanding how to buy a car when you have bad credit might be important. Luckily, we’ve got plenty of tips to help you manage this financial step.
Buying a new—or new to you—vehicle can be exciting. But before you show up to browse at a dealership and get caught up in negotiations, it’s helpful to do some research and consider your financial situation. Some things to consider include:
Once you understand your personal finances, you can move on to applying for a car loan. Here are some tips for buying a car with bad credit if you need a loan to do it.
When you review your credit situation, order your credit reports from all three major bureaus. Look for any inaccurate information, particularly any error that might be hurting your credit, and dispute it with the credit bureau.
For example, if you see that your credit card company reported a higher balance than you actually carry or that you’re shown as late on a payment when you’ve always paid on time, these issues could be dropping your score unnecessarily. The Fair Credit Reporting Act requires that credit bureaus review your dispute in a timely manner and delete or edit information that turns out to be incorrect.
Addressing inaccurate negative information on your credit report could help you improve your credit, which might help you get a better deal on a car loan.
Another way you might be able to improve your credit is by paying down credit card and other revolving credit balances. This can improve your overall credit utilization rate, which may in turn help increase your score. It also helps make lenders more comfortable taking a chance on you. If you don’t currently owe high balances to others, they may see you as someone who’s more likely to make a car payment on time every month.
The issue with trying to get a car loan with bad credit is that lenders consider you a higher-risk borrower than someone with good credit. In short, they’re worried you might leave them holding the balance on the loan, so they want to reduce their risk as much as possible.
Lenders attempt to reduce their risk by not approving people with certain credit scores, charging higher interest, and limiting the size of loan they’re willing to offer. For example, a lender might only approve you for a loan up to $20,000. You can work with that, even if you want a car that’s $27,000, if you can make a big enough down payment. In this hypothetical example, you’d need to pay $7,000 or more down to bring the balance within the range of loan the lender is willing to approve.
Another way you can reduce risk for a lender and potentially increase your chances of getting approved for a car loan is by getting a cosigner. A cosigner is someone who agrees to be responsible for the loan if you don’t make your payments. Typically, this needs to be someone with good credit and the income to make the loan payments.
Always consider this step carefully. You need a cosigner who’s willing to take this step with you, and if your financial situation changes and you truly can’t afford the vehicle in the future, your cosigner may be responsible for the payments. It’s helpful to have a solid plan for making your car loan payments and communicating everything up front with your cosigner.
Going out to buy a car without any financial backing can increase your chances of getting caught up in the moment and signing on the dotted line of a lackluster deal. Instead, consider getting preapproved for a vehicle loan so you know exactly how much buying power you have. A preapproval may also help you negotiate a better deal, because the car dealership or seller doesn’t have any financial power to hold over you.
Once you get a car loan despite bad credit, ensure you take steps to improve your credit in the future so your next time buying a car is easier. Make your car loan payment on time every month to build up a stronger payment history, and avoid taking out loans and racking up credit card debt unnecessarily. When you’re ready to start looking for a car loan, visit Credit.com to get free, no-obligation quotes from our network lenders.