How to get a car loan with bad credit

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If you have bad credit, getting a car loan may be hard, but it isn’t impossible. The most important aspect of getting a bad-credit auto loan is researching your options to find a loan that will best serve you, regardless of your credit score.

Here are 10 things you should know before you start the process of applying for an auto loan with bad credit.

1. Know your credit score

Before you begin the shopping process, check your credit score. According to the FICO credit scoring system, which ranges from 300 to 850, any score that falls at or below 580 is considered poor.

Your FICO score consists of a few categories, like how much you owe, the length of your credit history and your payment history. Not making your payments on time, consistently spending more than your available monthly credit and having a short credit history can all negatively impact your credit score.

There may be factors you’re able to address immediately, like making payments on delinquent accounts. Before applying for an auto loan, you should also avoid opening new credit cards or loans. Taking action to repair your credit score before you begin shopping can put you in a more favorable position with lenders.

2. Save for a down payment

If you have a lower credit score, making a down payment on a car can increase your chances of securing and getting approved for an auto loan.

Setting aside some extra cash each month for a down payment can also offset higher interest rates caused by a less-than-stellar credit score and can lower your loan-to-value ratio, helping you qualify for better terms.

3. Research, research, research

Prepare as much as possible so you’re not caught off guard when the time comes to negotiate. Before you apply for a loan, know exactly what monthly loan payment you can afford and what APRs are common among auto lenders. With a bad credit score, you’ll likely be offered some of the highest advertised rates.

If you’re buying used, it also helps to know the Kelley Blue Book value of your preferred car.

4. Shop around

Once you begin the shopping process, don’t limit yourself to just one lender. There are a variety of lenders that can help you secure a loan, including:

  • Banks/credit unions: If you already have a relationship with your bank or credit union, start here. Some banks and credit unions offer discounted rates for members.
  • Online lenders: Many online lenders offer a prequalification tool on their websites that allows you to see if you’ll qualify for the loan before applying, which can save you a hard credit check if you don’t meet the requirements.
  • Car dealerships: You can finance your car through a dealership if you meet the financial and credit criteria. You’ll meet with a representative of the finance department, and they’ll send your information to different lenders to provide you with a competitive rate. Some dealerships may also offer programs for borrowers with a bad credit history.
  • Buy-here, pay-here dealerships: Buy-here, pay-here dealerships can be useful if you don’t get approved by a bank or lender for a loan, but they should be approached with caution. While these types of dealerships may be more likely to approve someone with bad credit for a loan, the interest rates can be much higher. Make sure you research the rates and conditions before applying for a loan at one of these lots.

Even two candidates with an identical credit score may not be the same in the eyes of a lender, says John Van Alst, staff attorney for the National Consumer Law Center. “Even if your score is tarnished, you may have a better chance than someone with the same score and no (credit) history.”

Don’t dawdle — lenders run a hard credit check during the application process. Hard credit checks signal to credit bureaus that a borrower is about to take on more debt and can result in a dip in your credit score. Draw out the process for too long, and it could become more difficult to negotiate favorable terms.

To be safe, we recommend visiting or considering around three different lenders in a 14-day period.

5. Prequalify with lenders

Prequalification allows you to see if you’ll qualify for a loan before you apply. With prequalification, you’ll save time in applications and avoid unnecessary hard credit checks. Multiple hard credit checks have a negative impact on your credit score, and if you already have less-than- desirable credit, it’s always worth prequalifying with a few lenders to compare the rates and terms you qualify for.

6. Be sure the terms are final

If you finance through a dealer, always make sure the terms are final before you sign. If you don’t, you may face higher monthly payments or an increased down payment in the future.

It’s known as a “yo-yo scam”: Dealers tell car buyers their financing is not complete and they must accept a higher interest rate.

7. Avoid subprime lenders

Subprime lenders can seem like a sure bet to anyone wondering how to get a car loan with bad credit. These lenders usually cater to customers with lower credit scores and can make the car buying process seem easy and stress-free — at first.

Subprime car loans can come with sky-high interest rates and aren’t likely to help you improve your credit score.

Always do your research beforehand, and only consider subprime lenders if you are unable to find another financing option.

8. Shop loan terms, not monthly payments

Lower monthly payments look good on paper and are usually used to entice buyers. In reality, they may lead to you paying more for your car over the life of the loan, since they’ll come with longer terms. Because car loans for bad credit have higher APRs, you may end up paying more than the car’s full value by the end of the loan because of interest accumulation.

When you’re shopping, look for the most favorable terms — usually the lowest APR over the shortest period of time. That way, you’ll have more manageable monthly payments with reasonable interest rates. If you’re unable to find a low APR, you may want to consider shopping for a different vehicle.

9. Bring a friend with you — and consider a co-signer

Ask a friend or a relative to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the negotiating table can help inspire confidence. And confidence, combined with know-how, can lead to more favorable loan terms.

If this is someone that you really trust, consider asking them to be a co-signer. Co-signers reduce much of the risk for lenders — they’ll become responsible for the loan should you default on your payments. Adding a co-signer can be a strong negotiating tool and usually results in a lower interest rate.

Be absolutely sure you can make payments before taking on a co-signer. If you fail to make payments and the debt falls on them, it can permanently damage your personal relationship.

10. Look out for add-ons and scams

Nonprime buyers are more likely to encounter lending contracts with nonessential goods and services, says Josh Frank, former senior researcher for the Center for Responsible Lending. Other costs, such as car insurance rates, can pile up for nonprime buyers.

Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even car insurance. Be aware of these add-ons, especially if you need to apply at a buy-here, pay-here dealership or you’re planning on trading in your vehicle.

Bad credit doesn’t have to result in bad terms

Unfortunately, if you have bad credit, it may be tougher for you to get a car loan. You may face less favorable terms or even predatory lending practices.

The good news is that coming to the negotiating table with preparation and research can help you find a loan with a much lower rate. First, find the loan that’s right for you and pay it off to help boost your credit score. At that point, consider refinancing; you might find a loan with even better terms.

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