The Fortunly Guide to Auto Loans
Getting a car loan when your credit score isn’t at its best can seem like an impossible task. Interest rates are skyrocketing, and your choice of cars is often limited.
You’ve probably tried your local dealership, but if your credit score is far from perfect, come away empty-handed. Getting a co-signer for a better deal can easily turn into a relationship breakdown, and interest rates often seem better suited to paying off a space shuttle than a car loan with bad credit.
Lucky for you, the sole purpose of this guide is to find ways for you to buy the car of your dreams, regardless of your credit score.
What Constitutes Bad Credit For Auto Loans?
As we said before, there is no such thing as an unacceptable credit score for many car dealers. The optimal credit score for buying a used car is around 600, so everything below might seem like a disaster, but rest assured it is not.
Your credit score is not the only thing to consider when applying for a car loan with bad credit. The next most important thing lenders will look at is your debt to income ratio.
If you have regular income from employment or other sources, it will go a long way towards your approval. In fact, people who have never had a credit card in their life have been making regular car payments for years.
Preparing all of your paperwork before the meeting with dealers, banks, or intermediaries, and having an explanation of any potential imperfections can be a crucial factor in getting approved for bad credit auto financing.
To sum up, âbad credit scoreâ is a term open to interpretation by almost all car dealers. After all, the car serves as collateral, so they won’t lose much if you don’t make your payments on time. Dealers can repossess it and resell it to cover their losses. However, it would be best if you find the time to improve your credit score before you buy.
How Does Bad Credit Affect Car Loans?
Some people think that it is impossible to get car credit with bad credit, but this is very far from the truth. Yet, while that doesn’t prevent you from getting one or more, bad credit will impact the deals you get.
Simply put, bad credit affects the terms of the loan. To be more precise, the down payment you will have to make will probably be higher than what you could have expected. The interest rates you will be charged can fluctuate wildly, possibly reaching very worrying highs. On average, people who apply for a car loan with bad credit end up paying interest rates four times higher than people with impeccable credit scores.
Loan terms have increased over the past two years, but it’s not as likely if your credit is poor.
How to get a loan with bad credit?
The process isn’t much different from trying to get one with good credit, but there are some things to keep in mind.
The lender will ask you for employment and asset ownership, as well as the car you plan to buy, to determine what type of bad credit car loan you are eligible for.
In short, get your paperwork in order, make sure you dispute any irregularities on your credit score or spend time improving it, and do your research online to find the best lender.
What should you watch out for?
There are many dealerships with âBuy here, pay hereâ signs that claim they can finance anyone, regardless of their credit rating. It might sound like a good deal, but make sure the terms are reasonable. Interest rates of 20-30% are not uncommon for bad credit auto loans, and you can rest assured that companies that charge so much don’t make a living selling cars.
If you accept these offers, you will have a hard time getting through. Most of these dealerships are very aggressive with their repossessions, some of them picking up the car after only one day of being late on your payment. Repossessions can seriously damage your credit score, which could lead to other long-lasting hardships.
It’s a better idea – virtually mandatory, in fact – to get pre-approved bad credit auto loans before you go to the dealership. With a fair and valid offer already in your hands, dealers may be incentivized to offer you a better one.
Another thing that you need to be careful of when you have bad credit is what type of car you are buying. You should go for a car that won’t make a huge dent in your budget, the price of which you can convert into reasonable payments. You don’t want to stretch too much, so make sure you can pay off the bad car loan.
Can A Car Loan Help Your Credit?
Yes, by adding to your payment history and your credit combination. However, some lenders do not report payments to bureaus, so it is essential to verify this before choosing one.
If you pay your bills on time it will be a huge bonus to your credit score because payment history matters more than other factors. A loan can also be a welcome addition to your credit mix, especially if you’ve only had credit cards until now.
Anything that can improve your credit score deserves your attention, even used car loans with bad credit. Try to make your payments on time, create a plan to get rid of any debt you may have, and the next loan you take will likely be on much better terms.