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Bad credit can make buying a car from a traditional dealership difficult. Bad credit auto dealerships work with credit-challenged buyers to arrange financing. But beware: These dealerships usually charge higher interest rates and fees, and they may not report your payments to the credit bureaus.
Compare the rates and fees offered by the bad credit auto dealer with those offered by banks and credit unions to ensure you get the best deal. You may find that a loan from a traditional lender is a better fit.
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. The FICO credit scoring model counts all auto loan applications submitted in a 14-day period as a single inquiry.
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
At a “buy here, pay here” dealership, you may be offered a loan without a credit check. This appeals to consumers with subprime credit who find it challenging to get approved for an auto loan elsewhere. Plus, financing is handled in-house, making these dealerships a one-stop shop.
Still, you will only have used cars to choose from. And you’ll still need to meet the eligibility criteria. You can expect steep borrowing costs, and the lender may place a shut-off switch or tracking device on your car to make it easier to repossess if you fall behind on loan payments.
Plus, you may be put into a financing program that doesn’t report your payments to any of the main three credit bureaus — Experian, Equifax or TransUnion.
Subprime auto lenders
Other dealerships 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 improve your credit health if the lender reports payment activity — assuming you make timely loan payments.
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. Experts suggest that you spend no more than 20 percent of your net income, or take-home pay, on an auto loan payment and other car-related expenses. You’ll need to work insurance, gas, maintenance and registration fees into your budget.
Save up a down payment
A big down payment may be enough to boost your approval odds and sweeten the deal offered by the dealership. It also reduces the loan amount, giving you a more affordable monthly payment. Plus, you’ll drive off the lot with more equity in your vehicle and pay less interest over the life of the loan.
Ideally, you want to save up at least 20 percent for a down payment. But if this is not feasible for your financial situation, save as much as you can comfortably afford — we recommend 10 percent of the purchase price.
Use a down payment calculator to determine how much you could save on your monthly auto loan payment.
Shop around and 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.
Plus, getting preapproved gives you leverage at the dealership. You can negotiate like a cash buyer to get the best deal. Or the dealer may be willing to match or beat the terms of your loan preapproval to earn your business.
Even if you receive preapproval for 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.
Also, be mindful that many used car dealerships work with the same lenders that offer car loans directly to consumers. You may be able to get prequalified for the same loan the dealer would offer but without the dealer’s markup.
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 online and traditional lenders offer bad credit auto loans directly through their platforms.
- 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.
- Improve your credit. If you can hold off on buying a vehicle, it may be worth paying down your other debts and improving your credit before buying a car.
- Save up. This is another option if you can wait to buy. 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 give you 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.