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—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 looking for a bad credit auto loan should be prepared and enter the process knowing they’ll probably have to pay a higher interest rate than the lower interest rate that someone with decent or good credit would be paying. But don’t let that discourage you.
There are car loans available for people with bad credit, but you need to be careful when shopping for a bad credit auto loan 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 monthly 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 and credit rating.
Your credit scores are a big influencer when it comes to lenders deciding which interest rate you will receive for your auto loan. Check your credit from all three major credit bureaus months before you begin your car shopping journey and track your credit history to see areas you may need to clean up or build credit.
Knowing your score before you shop can help you save money on the car loan interest rate and can help you catch any errors that may be on your credit report. Doing this a few months ahead of time will provide you with the time you need to get everything in order and take the necessary steps to improve a poor credit score and gain access to the better loan rates.
2. Improve your score
As just mentioned, one of the biggest reasons 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 shopping and looking for an auto finance company.
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 auto finance process to improve your poor credit score and re-establish credit in the meantime may be the best answer and may save you money in the long run.
3. Find a dealer who will work with you
If car buyers need a car now and have a credit score that falls below the 500 or 600 range, then there are a couple of options for car financing, 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,”
“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 pre-approval for an auto financing from a bank or credit union, which could better prepare them for the car shopping process. This pre-approval process analyzes your income, expenses, credit score, and credit report and determines if you qualify for an auto loan from the lender and how much the lender would be willing to lend.
“With that letter in hand, car shoppers can go to car dealerships 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 when going through the loan approval process.
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?”
Auto loan refinancing could help lower your auto loan rates as well as your monthly payment which could end up saving you hundreds of dollars over the remaining term of the auto loan.
Typically, for loan refinancing, you want to be sure you have an upstanding and on-time payment history for at least twelve months, so you can qualify for a lower rate that will save you money. However, keep in mind that the loan refinancing will also take your credit history and current credit scores into account as well. So as always, continue working diligently to improve and rebuild your credit rating and build good credit.
Be smart about your credit while you are shopping for an auto loan and car financing. 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 interest 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, rebuild credit, and work towards bettering your credit scores. 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 and credit 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 car dealerships 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 to 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. Check your credit reports from all three of the major credit bureaus and shop around for the best rate, even if you find that you have less-than-perfect credit.
Auto loan calculators are also good tools to use when you are trying to determine how much car you can afford, and the auto loan calculator can also provide you with the overall total estimate that you will be paying for the entire term of the auto loan- interest included. This is especially good information to have if you are working with bad credit car loans.
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.