the advent of automotive finance has made it possible for more people than ever before to enjoy the thrill of getting a brand-new car.
by spreading the cost over 3-5 years of monthly payments, an auto loan allows buyers to “level-up” their target cars somewhat and purchase something that really meets their needs, perhaps even exceeds them.
the specter of bad credit
one problem persists for aspiring owners of new cars, however, and that is bad credit. to qualify for an auto loan, or at least an affordable one with reasonable terms and conditions, requires you to have a good credit score.
when you have a strong credit rating, dealerships are willing to offer much better deals, including lower interest and therefore lower monthly repayments, even on a more expensive car.
can you even buy a car with bad credit? yes, but the task can be much more challenging, especially if you want a high-quality car. in today’s blog, we’re offering our best tips on how to buy a car when your current credit score is far from ideal.
how to buy a car with bad credit
1. make a longer-term plan
there are ways of building up your credit rating before you get to the point where you’re ready to buy a car. it takes longer-term planning and you’ll need to be doing these things for several months, possibly even a year or two in order to get where you need. any improvement you can affect, however, will increase your chances of being accepted on better terms.
credit-boosting steps include: paying off past-due accounts, disputing credit report errors, using credit for smaller purchases and then making frequent repayments, and ultimately asking for an increase on your credit limit. if your record shows these things, your score will improve and your chances of getting a better auto loan increase with it.
2. minimize credit impacts
as you’re working to actively improve your credit score, you should also be sticking to positive financial behaviors that prevent further impact to your credit score.
these include things like being late on a rent payment, being involved in lawsuits, and companies charging off your accounts. when it comes to applying for an auto loan, such things will all count as red flags against you.
3. know your interest rates
your credit rating is the deciding factor in what kind of interest rate you can expect to pay on any auto loan for which you qualify. it’s very important, therefore, that when buying a car with a poor credit rating you know the most current interest rates. you can check these online, and the number you get should give you an idea of how much you can expect.
if your credit rating remains below par, then you will pay higher than that. use this insight to know when is the right time to apply for a car loan, and/or how much more you’ll likely need to boost your credit before you pull the trigger.
4. offer more money down
sometimes to really get your foot in the door at the dealership, you can make a bigger offer of a downpayment. the fact is that having a bad credit rating doesn’t always mean you have no money. it could be that you’re emerging from a tough period, and you find yourself fairly cash-rich, but just credit-poor.
in these situations, offer a bigger deposit. it sets the dealerships mind at rest somewhat, and it helps to offset some of the difference in monthly payment levels, even when you borrow at a higher rate of interest.
5. keep it simple
when buying a car with poor credit, you may have to set your sights a little bit lower when it comes to your vehicle choice. a car may be a depreciating asset, unlike a property, but there is still a ladder you can climb from a more basic model without all the bells and whistles that you might want up to something more advanced.
when you know your interest is likely going to be significantly higher than a buyer with good credit, you have to know your limits.
keep things simple to make the vehicle more affordable, and continue your efforts to build credit over time. by the time you want another car, your rating will be in a better place.
6. prepare a budget in advance
before you even start heading to dealerships to test-drive your favorite models, you have to be very clear in your mind on how much you can afford. when your credit is bad, the terms and conditions won’t be as favorable to you, which means you can’t afford any mistakes with this loan.
therefore, you should conservatively plan a budget and then stay comfortably within those bounds on this particular car purchase.
7. look into preapproval
when you are ready to start looking, it can be a good idea to first make some inquiries at your bank or with a car dealership about loans and get approved for a fixed amount in advance.
budgeting and planning become a lot easier if you can make this happen because you won’t have to just guess at how much you can afford.
in addition, getting preapproved removes the fear of an awkward moment when you have invested time and energy with a dealership only to be turned down at the loan approval stage.
8. shop around for credit
as an extension of tip #7, it’s essential that when your credit is poor you spend time shopping around for the best-possible deal. it’s easy to be taken in by dealerships that offer you “one-stop-shop” service, including fast finance without stringent checks.
part of being able to get your hands on an auto loan so conveniently is invariably a higher interest rate, higher monthly repayment, and a lot more pressure to meet your obligations.
9. don’t plan on a trade-in any time soon
when you’re at the bottom of the ladder preparing to climb, you have to be more patient as you make the initial steps. some think that you can take one model this year, and then trade it in for something better next year. car salespeople even push this approach as beneficial. if you just want a new car each year, then you could say that the benefit is real, but financially it is not.
when you trade-in without a good enough credit score to properly renegotiate the financial terms, you will end up paying more. the balance from your previous loan will be added to this new one, which with your continued higher interest rate just means you’ll be paying, even more, giving yourself more pressure.
keep the car you get for as long as it takes to properly and meaningfully boost your credit.
10. when it looks too good to be true, it usually is
you have to be mindful of any auto loan terms that appear at first glance to be extremely advantageous to you. in the world of financing, what is beneficial to you in the short term is usually done to ensure a greater long-term benefit for the finance company or car dealership.
seemingly fantastic perks like being able to drive the car away before you finalize the paperwork is a good example. when you’re called to come back and sign things, you might notice some changes were made, and by then it’s too late.
in addition, look out for shifting payment conditions. are your repayments set to increase at some point? is additional interest set to kick it at any time? you need to be clear on every condition and make sure what you’ve verbally agreed with the dealership is the same as what’s on the paper. only the latter holds up, legally.
conclusion: when buying with bad credit, shop smart
the entire world of commerce, including purchasing vehicles, is made easier by a strong credit rating. when your credit rating is currently suffering, you need to be smart, and you need to be disciplined. you have to play a longer game both with the financial institutions and the car dealerships.
hopefully, these tips will see you get favorable terms on your next car purchase. should you secure a good deal, then remain patient, keep on the straight and narrow and build up your credit to the point where the next deal will truly be better.
