If you’re like most Americans, you don’t have perfect credit. In fact, the average credit score is below 700. If this sounds familiar, then you’ve probably been told that it’s impossible to get an auto loan.
But that’s not true at all.
The good news is that it’s possible to get auto loans with bad credit. That’s right. You can finance your dream car even if your credit score isn’t perfect.
The bad news is that it’s not going to be easy (or cheap). Here is what you need to know about getting a car loan when your credit isn’t in tip-top shape.
Do You Need Good Credit for a Car Loan?
There are plenty of lenders out there who will finance your car purchase even when you have bad credit. Lenders also offer no credit auto loans for people who have yet to establish their credit score. So, don’t give up hope just because your credit report has a few blemishes.
However, it’s important to get realistic about what you can expect. You need to understand that you won’t be able to snag the best interest rates and loan terms that are currently available if your credit score is low.
How to Get Auto Loans With Bad Credit?
The odds of getting a car loan are better than you may think. Sure, your credit score matters as it tells lenders how likely you are to repay a loan on time. But there are other factors in play as well, such as your income and the amount of debt you already carry.
Let’s dive into the steps you need to take to secure bad credit auto loans.
Get Familiar With Your Credit Score
Check your credit score before applying for a car loan. You’ll likely land somewhere between 300 and 850, but it’s also possible to have no credit at all. Credit scores below the mid-600s are generally associated with fewer loan options.
Review the report carefully, looking for errors or accounts that could be brought up to date. If you spot any discrepancies, take the time to file a dispute with the credit bureau.
Determine How Much You Can Afford
Think about all the costs of car ownership when deciding how much you can afford to borrow. These costs include fuel, regular maintenance, and auto insurance as well as parking and property taxes. Make a budget and don’t overload yourself with too big of a loan.
Save Up for a Large Down Payment
Save up as much money as possible for a down payment. This will reduce the amount of interest you pay on the loan and decrease your loan term.
Industry experts recommend saving 20% of your potential loan for a down payment. The average American, however, pays 11% of their loan. But for those with low credit scores, it helps to put down more than the average.
Get Pre-Approved for an Auto Loan
Don’t wait until you’ve found a car to get a loan. Go to several lenders before buying the vehicle so you know how much they’ll be willing to lend to you.
Avoid Hard Credit Checks
Look into lenders that will pre-approve your loan before they run a credit check. Since you are self-reporting your credit score, there is no need to check it, but many lenders do.
The lender will give you an estimated loan amount. This amount, however, is subject to change depending on the results of a credit check.
If you aren’t sure whether you want to accept a loan, avoid having a hard credit check done before you decide. This way, you can keep your credit score from falling and still consider all of your options.
Prove Your Income
Lenders use several data points to determine whether you’re likely to repay your loans in full and on time. One of the biggest factors is your income.
Lenders are looking for proof that you have stable, year-to-date income from your job when evaluating your loan application. Usually, companies are looking for an annual gross income of at least $18,000, but some go lower or have no minimum.
Reduce Other Debt
If your debt obligations amount to over 45% of your take-home pay, you will probably have trouble finding a lender. It helps to pay off high-interest debt, like credit card balances, before taking on more loans. This will give you a better chance of qualifying for an affordable loan.
Consider Your Loan Term
While you might reduce your monthly payment by lengthening the term of your auto loan, it will cost more over time. Interest rates are typically lower for shorter terms (such as 24 or 36 months).
Long-term loans come with the risk of negative equity, which is when you owe more on your loan than the car is worth. This can happen if you have an accident or other damage to your vehicle early in the life of your loan.
Have a Co-signer
A co-signer with a good credit score can help you qualify for an auto loan and get a lower interest rate. Be sure to review the terms of your loan agreement with your co-signer so you understand both of your obligations.
How Much More Do You Pay For A Bad Credit Auto Loan?
New-car buyers with very poor credit scores paid an average interest rate of 14.59% while used-car buyers with the same credit quality paid an average interest rate of 20.99%. In contrast, buyers with a credit score above 650 pay a rate of about 11%.
Where To Find Bad Credit Auto Loans
While people with low credit scores may have a more difficult time finding auto loans than those with good credit, there are still plenty of options available to them. Here’s where you should start the search for a bad credit car loan:
Banks
Banks are likely among the first places you’ll look for a loan. Many of these lenders have special offers for people with bad credit, but it’s important to keep in mind that approval rates are low.
Dealerships
Many dealerships have their own financing programs, and these may be a good place to start if you’re looking for bad credit auto loans. The downside of dealership financing is that it often comes with higher interest rates than loans offered by banks and credit unions. Even if you find a dealer who offers low rates, it’s still important to shop around at multiple places before making your decision.
Credit Unions
Many credit unions specialize in offering auto loans at lower interest rates than those provided by banks and other lenders. However, to become a member of most credit unions, you’ll likely need to meet certain income requirements.
Online Lenders
Many online lenders specialize in providing auto loans to people with bad credit. These companies typically have looser lending requirements than banks and can often provide financing for those who wouldn’t qualify for a traditional auto loan.
How To Get A Lower Interest Rate With Bad Credit
It takes time to improve your credit score. So, you can’t count on raising your score quickly to get a lower interest rate on your auto loan. Instead, focus on getting the best car loan you can find by following these simple tips:
Buy A New Car
Loan rates are usually lower for new cars than for used ones. So, if you’re in the market for a new car anyway, this could be a wonderful opportunity to lower your interest rate by at least 3%.
Get A Shorter Loan Term
A shorter loan term will lead to higher monthly payments, but it may also secure you a lower interest rate and thus reduce the overall cost of your auto loan. Plus, if you pay off your car sooner rather than later, you’ll accumulate less interest.
However, some lenders impose a prepayment penalty. Before paying off your loan early, review your contract to avoid any costly surprises.
Get Approved for Bad Credit Auto Loans in Minutes
When you have bad credit, it can feel as though you’re stuck between a rock and a hard place when it comes to getting an auto loan. You might worry that you’ll run into even more rejection, or worse, get caught in a scam. With the right lender, however, you can get approved for auto loans with bad credit in just one day.
At CarsFast, we work with a vast network of dealers, many of whom specialize in helping people with credit problems get financed. Complete our loan application form and get behind the wheel of your new car today.