Credit affects every aspect of our financial lives. No matter how well or poorly you’re doing, your borrowing history follows you through all your monetary affairs, for better or for worse. Poor credit can stand in your way when planning large purchases: renting or buying a new home, taking out a new loan or line of credit, or purchasing a new vehicle.
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Buying a car with bad credit can present specific challenges. Most car dealers base their loan terms, including interest rates, on your financial situation. One of the most significant factors they weigh is your credit score.
A low credit score may hinder your options, but it doesn’t have to mean you’re stuck riding your ten-speed to work. If you’re in the market for a new car, but you’re carrying a troublesome credit history, you still have options.
How Dealers Look At Your Credit
When you shop for a car, whether new or used, the dealer will establish the terms of the financing based on your perceived ability to pay. Along with your loan history, income, employment status, and other factors, they will look at your credit score. When dealers see buyers with low credit scores (known as subprime buyers), they identify them as being at a greater risk of default. This translates to tougher terms, and higher interest rates, on these loans. There are many lenders who specialize in offering bad credit car loans, but be prepared to receive a higher interest rate and tighter payment terms than with an ordinary financial institution.
If you have positive credit (i.e., a credit score of 740 or higher), you’ll enjoy the best interest rate on a car loan, possibly even 0% interest financing. However, a credit score at the opposite end of the spectrum will often mean a higher interest rate. A low credit score, typically considered one below 620, could mean rates as high as between 20% and 30%, adding hundreds, or even thousands, extra paid on the vehicle over the life of the loan.
What To Do If You Have Bad Credit
If you’re in the market for a new car and a regrettable credit history is standing in your way, there are several options to consider.
Wait it out
If you don’t need a car immediately, you might want to hold off before diving in on a big purchase. Take any time you can manage to save up for a down payment, to improve your credit score, or to build a credit history if yours is lacking. If missing payments on existing debt has affected your credit score (35% of your credit score is defined by your payment history), meeting those payments consistently and on time, even for a few months, can have a positive impact.
Secured Credit Cards
You can also rebuild your credit by taking out a secured credit card. These cards require a deposit upon opening as collateral, but they offer a practical alternative for subprime borrowers and an opportunity to repair an ailing credit history. Most major financial institutions offer some version of a secured card with a variety of terms. Improving your credit score, even slightly, can make a difference when securing an interest rate for your car loan.
New vs. old – Financing A Used Car With Bad Credit
While a tight financial situation might have you looking at used vehicles, purchasing a new one instead could get you a better interest rate when you have bad credit. New car manufacturers often have deals or special offers that might save money in the long run, and they can be more forgiving of bad credit. That said, the savings on the sticker price of an older used vehicle might mean a better overall deal. You may even find a vehicle you can buy in cash, and thereby avoid the need for financing altogether.
Get a cosigner
If your own financial situation is dire, think about having someone cosign the loan. If the cosigner’s credit score, income, and lending history are much better than yours, they can essentially vouch for you. A cosigner should be someone you trust; if you default on the loan, they’ll be on the hook on your behalf. However, if you make your payments on time, it can boost your personal credit score.
Another route is purchasing a car with a co-borrower. In this case, the other individual will own the car equally with you. This might be ideal for a family car to be shared with a spouse or partner.
Go for a shorter loan period
Shorter loan terms usually mean higher monthly payments, which can be deterring if cash is currently tight. But shorter terms also tend to mean lower interest rates, which adds up to less actual money over time. Paying off the car quicker can also eventually give you some breathing room to work on improving your credit.
There are many reputable lenders out there offering a vast array of financing options, many of whom specialize in working with buyers with bad credit, so do your research. One lender or bank may offer different terms based on your credit score than another. A lender might also pledge to meet another lender’s terms on a different car, meaning you’ll be driving a nicer or newer vehicle while paying the same interest rate. Try to find a lender’s auto lending rate sheet, which outlines their rates for new or used vehicles. This could provide you with valuable information, and possibly some negotiating power, when you meet with the dealer.
Time To Get Started
Don’t let a bad credit history make you timid about pushing for the best deal available on your next vehicle. You don’t have to automatically accept the first rate offered. With a bit of planning, and by asking around to various lenders and financial institutions, you’ll find a vehicle that suits your needs, income, and lifestyle.