Bad credit can put a damper on a lot of things, including loans. But it is possible to get a car loan with bad credit in 2018 — it’s just going to cost you, said Matt Jones, consumer advice editor for Edmunds, an online resource for car information based in Santa Monica, California. Auto loan seekers with bad credit should be prepared and enter the process knowing they’ll pay a higher rate than someone with decent or good credit. But don’t let that discourage you. There are car loans for people with bad credit, but you need to be careful when shopping for one to make sure you aren’t overcharged. Let’s break down the art of getting financed for a car and landing an easy car loan approval with bad credit.
Buying a Car With Bad Credit
1. Check your credit
“The very first thing a person should do is ask themselves what makes them think they have lousy credit,” said Jones, a dealership veteran who frequently encountered worried car buyers who weren’t sure of their credit score. “Do they know they have lousy credit because someone’s told them that?” You may think you have bad credit because you’ve overextended your budget or are making late payments, but it’s important to know for sure so you don’t make decisions based on assumptions. You can view two of your credit scores and get an easy to understand credit report snapshot for free once a month at Credit.com. In addition to your score, you will see what factors are having the most impact on your scores.
2. Improve your score
Another, more obvious, reason to check your credit report is to see what you need to improve, Jones said. You may find mistakes on your credit reports that, if fixed, will help boost your credit scores. If possible, give yourself at least 30 days to dispute credit report mistakes before you start car loan shopping. If your score isn’t as bad as you thought, perhaps paying off credit debt, clearing up errors or taking care of old collection accounts could bump you over that coveted 700 threshold. Delaying the car loan to improve your score in the meantime may be the best answer.
3. Find a dealer who will work with you
If you need a car now and have a score that falls below the 500 or 600 range, you have a couple of options, Jones said. “If you want to get a car through a dealer, you’ll need to find the right kind of dealer that can handle that kind of loan.” But this shouldn’t be difficult, as most dealerships probably have “10 to 20 different lending institutions that they’ve worked with at a given point,” Jones said. “You’ll have a lot of choices, depending on your credit situation.” Another option would be to secure your loan through a bank that has a relationship with the dealer, Jones said. “Occasionally, they can ask for a favor.”
4. Consider getting pre-approval
For those with truly dire credit, Jones recommended getting a pre-approval from a bank or credit union, which could better prepare them for the car shopping process. This pre-approval analyzes your income, expenses, credit score and report and determines if you qualify for a loan from the lender and how much the lender would be willing to lend. “With that letter in hand, car shoppers can go to the dealership and shop for a better approval,” said Jones. Much like a mortgage pre-approval, submitting your paperwork early and learning what obstacles you face could spare you a lot of headaches later.
Questions to Ask Before Getting a Car Loan
To make sure you get a car loan that works for your budget, it’s important to ask pertinent questions, said Jones. For starters, you’ll want to know how much interest you’ll be paying over the life of the loan. Make sure there’s no prepayment penalty — meaning, you won’t be fined for paying off a loan quicker than agreed. Also, find out the necessary steps for refinancing a loan with a high interest rate. One way to phrase it: “How long do I have to deal with this until I can change and get something more reasonable?”
Be smart about your credit while you are shopping for an auto loan. Every time a lender pulls your credit report, it creates an inquiry on your file, and these inquiries can hurt your credit scores. Most scoring models will count auto loan inquiries with a certain window – usually 14 to 45 days – as a single inquiry. To be on the safe side, limit your auto loan shopping to a two-week period to avoid damaging your credit scores further.
More Ways to Save Money on Car Loans
If your credit is poor, you may be stuck paying a higher rate until you can improve your credit scores. Don’t let high rates stick you in a rut. The best way to deal with high rates is to save as much as possible and work towards bettering your credit score. Here are some additional ways to save money on car loans:
- Choose a shorter-term loan. A three-year loan, for example, tends to carry a lower interest rate than a five-year loan. Be realistic about this and your financial situation. Ensure you will actually be able to pay the loan back in a shorter time period, if not, it’s probably better to play it safe and choose the long-term loan.
- Purchase a newer car. Loans for used vehicles are usually more expensive than those for new vehicles, but if you find a good deal on a used car, you ought to consider it. While shopping for a car, factor the cost of the car loan into your purchase
- Avoid pricey add-ons. Loading up on pricey car add-ons, which the dealer may try to convince you are necessary, can be a recipe for heartache. Extras like rust-proofing, paint protection, VIN etching, and more can quickly add onto the sales price.
- Shop around for your loan. It never hurts to compare rates from other lenders like banks or credit unions before settling on a loan straight from the dealership.
- Make additional payments when possible. Remember, the quicker this loan is paid off, the better. Temporarily cutting down on other expenses will allow you to put more towards your auto loan, meaning you’ll pay less interest.
Overall, it’s definitely possible to buy a car with bad credit and you can even do so with an auto loan. Remember to explore your options and continue working toward an improved credit score. Be prepared when entering the process. Whether you’ve got bad credit or not, remember to budget carefully and stay up to date with your credit score always — especially when in the market for a new ride.
Paige DiFiore and Gerri Detweiler contributed to this article. This article has been updated. It was originally published October 26, 2016.