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What is a bad-credit auto dealer?

A close up of several cars on a lot
Alan Schein Photography/Getty Images
A close up of several cars on a lot
Alan Schein Photography/Getty Images
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Bad credit can make it difficult to buy a car from a traditional dealership. However, bad-credit auto dealers can help you get a loan and get approved. These dealerships usually charge higher interest rates and fees, and they may not report your payments to the credit bureaus.

It is best to compare the rates and fees offered by the bad-credit auto dealer with those offered by banks and credit unions to ensure that you are getting the best deal.

How bad-credit auto dealerships work

Buying a car through a bad-credit auto dealer is much like buying from any other dealer. The only difference is that you might have a tougher time finding a competitive interest rate. But, like a traditional dealer, you will walk away with a new — or new to you — car and a loan to pay off.

Because you have a less-than-ideal credit score, you’ll be offered a higher interest rate than a customer with good credit. The dealership will also take a commission, which is usually added to the interest rate offered.

Bad-credit auto dealers may still require a credit check, depending on the type that you go to. Be prepared to have a fresh inquiry on your report by picking out all the places you may want to apply ahead of time so you can keep your shopping window tight and avoid multiple hits to your credit.

Financing offered by bad-credit auto dealers

Many bad-credit auto dealers will finance a car regardless of your credit. Still, your options are limited. Some dealers may charge extra fees for the financing option or take a larger commission.

Buy here, pay here dealers

You may also be put into a financing program that doesn’t report your payments to any of the main three credit bureaus — Experian, Equifax or TransUnion. This is most common at “buy here, pay here” (BHPH) dealerships. At a BHPH dealership, you may be offered a loan without a credit check, but you will only have used cars to choose from, and there will be other eligibility criteria that you have to meet.

Subprime auto lenders

Other dealerships simply work with subprime lenders to offer financing to bad-credit borrowers. These lenders may or may not report to credit bureaus. If you’re unsure, ask. Having an auto loan can be a good way to help build your credit up — as long as you keep up on payments — but it won’t be if it’s not reported.

Regardless of which option you’re going for, it is best to compare the offered rates and fees with those you’d get from a bank or credit union on your own to ensure that you’re getting the best deal.

How to get the best deal at a bad-credit auto dealership

To get the best deal, think about your needs well before you arrive. If you know that you want a specific car, it might be best to shop local inventories online when you’re doing your research. You’ll have a better chance of knowing your options and what cars you’d like to drive. Be mindful of the sales process and avoid impulse purchases that you might regret later.

Determine your budget

Determining your budget is a crucial step in the car-buying journey. Work out how much you can afford monthly, including the other bills and expenses you have, and subtract the amount you need to put toward other debts, such as student loans or credit cards.

Also keep in mind that financing is only one part of the cost of owning a car. You also need to work insurance, gas, maintenance and registration fees into your budget.

Get preapproved

Before heading to the dealership, reach out to banks, credit unions and online lenders that may offer preapproval for car loans. The dealership will likely offer you a car loan, but outside lenders might give you better rates and terms if you can qualify.
Most of the time, used car dealerships work with the same lenders that offer car loans directly to consumers. In this case, you’ll be able to get prequalified for the same loan the dealer would offer, but without the dealer’s markup.

Shop around

Even if you receive preapproval with what seems like a decent rate, don’t go for the first loan offer you receive. Shop around to see if you can get a better rate elsewhere. Just keep your shopping within a two-week period to avoid multiple hits to your credit.

Alternatives to using a bad-credit auto dealer

Car dealers are not always the best route to consider when buying a vehicle — even a used one — if your credit is not in top shape. There are many other ways to get a vehicle if you have a bad credit score, including:

  • Direct lenders. These lenders have online platforms that offer direct applications to people with poor credit.
  • Credit unions. Many credit unions have more lenient lending requirements than banks and offer special financing for members.
  • Get a co-signer. A co-signer is someone with very good to excellent credit — typically 740 or more — that guarantees repayment of the loan if you can’t. A lender may view you as less of a risk with a co-signer and offer a better rate because of it.
  • Improve your credit. If you can hold off on buying a vehicle, it may be worth taking the time to pay down your other debts and improve your credit before buying a car.
  • Save up. This is another option if you’re not pressed to buy now. If you can save up for a less expensive used car, you may be able to forego financing altogether.

The bottom line

Bad-credit auto dealers may be able to help you get a loan and get approved, but they might not be the most reliable option when it comes to finding the best deal. Before heading to a dealer with bad credit, research auto loan rates with your local credit union and other lenders to see if you can qualify for a better deal.

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