When you have bad or no credit, it can seem impossible to get a car loan. But it isn’t!
Buying a new or used car can be stressful. After all, it’s one of the most expensive purchases you’ll ever make aside from a home. Many first-time car buyers also worry about having less-than-stellar credit when going to make a purchase. Luckily, there are tons of purchasing options available to car buyers in all sorts of credit situations.
Here are some steps can you take to maximize the chances of getting a new or used car loan:
- Check your credit score and take action to improve it
- Understand how much you can afford to pay each month
- Look for a pre-approved loan
- Have a cosigner
- Ask for a shorter loan period
- Seek a private loan
- Act quickly once you’ve done your research
1. What’s your credit score?
The most important factor that car dealerships will use to determine your approval or denial for a car loan is your credit score. The higher your credit score, the more likely they’ll approve the loan and the lower your interest rate will be.
It’s important to know what your credit score is and, if it’s poor, research ways that you can work to improve it. Sometimes, your credit report may include an error that is negatively impacting your score, which can be corrected and save you hundreds of dollars in interest payments over the years.
2. How much can you afford?
Before you even step foot on a car lot, you should have a budget. This isn’t a budget of how much you want to spend on a car; rather this is the budget of how much you can afford to spend on a car. This specific budget should be a subset of your larger, overall budget which accounts for your total expenses versus your total income. If you’re consistently spending as much as you earn, you will have to scale back your spending to accommodate for the additional car payment per month.
In addition, consider waiting to save for a larger down payment. The less money you choose to finance, the “safer” the loan is viewed by the particular lending institution. If you finance the full value of a new car, this will come with a much higher interest rate than if you were to finance only half the value of the car and pay for the other half as a down payment in cash.
If you have bad credit and owning a car is not an absolute necessity at the moment, it may make far more economic sense to wait a bit longer until you are able to acquire more cash for a larger down payment.
3. Are you pre-approved?
Once you know your budget, you can begin seeking out pre-approval for a loan. This is basically when a financial institution agrees to loan you a certain amount of money, assuming all of the information that you provided them is true. Car dealerships are more likely to work with you if you’ve been pre-approved for a loan because they know they’ll be getting paid for the car regardless of your credit history.
4. Do you have a cosigner?
When someone wants to buy a car, it isn’t always their fault that they don’t have a credit history. At times, it is simply because the consumer is too young to have ever needed it. Unfortunately, those with very poor credit aren’t trusted by a dealership to make regular monthly payments on time. To assuage their fears, many new or used car buyers will purchase the car with a cosigner. Cosigners are people who agree to make the payments on an asset if the original party fails to do so.
It is usually best to have a family member or a trusted friend co-sign your car loan. A co-signer is someone with an established credit history who can vouch for the consumer with no credit history. In the case of a car, if the buyer fails to make the monthly loan payment, the dealership can legally seek payment from the cosigner. The co-signer is liable for any payments that the purchaser of the vehicle does not make which means that it is imperative that you make your payments in full and on time when someone is generous enough to co-sign a loan for you. Having a co-signer with great credit can also lower the interest rate you pay on a loan.
Be sure that the cosigner is aware of their legal obligation prior to seeking their signature on the car loan.
5. Can you get a shorter loan?
All too often, new and used car buyers look only for the lowest monthly payment possible and fail to account for other factors that may cause them to pay more money in the long term. One way dealerships tend to lower monthly payments is to extend the lifetime of your car loan. This means you will be paying back the loan over more months which lowers your monthly payment but increases the total amount of interest paid on the loan. Attempt to seek as short a loan period as you can afford in order to lower the overall interest rate and save you tons of money over time.
When a lending institution lends out their money, they set your interest rate based on how long it’s going to take to get that money back in addition to your perceived ability to pay it back. To address one of these concerns, car buyers with bad credit can elect the shortest loan period they can reasonably afford. This means the lender will get their money plus interest back sooner meaning they would be more willing to offer a better interest rate.
Pro tip: Use our free auto payment calculator.
6. What about a private loan?
For those with no credit, look into seeking out a private loan. At times, certain banks and credit unions will give out private loans if you have been a loyal customer for a long enough period of time. And while personal loans for someone with no credit history usually come with a higher interest rate, this can be a good way to both purchase a car and establish some form of credit. As your credit builds and you become more trustworthy to lending institutions, you may even be able to refinance your personal loan over time to a far lower interest rate.
7. Are you ready to act?
When you apply for a car loan, the car dealership will do what’s called a “hard credit pull.” This is so they can assess your ability to repay the loan. Unfortunately, your credit score will be lowered if you have too many hard credit pulls in a given year. This is because banks don’t like to see that you are frequently in the market for a big loan.
For this reason, doing your research beforehand is imperative. If you’re going to apply for multiple loans, make sure everything is lined up and do so all within the same two-week period if possible. This is because anything done inside the same two-week time frame is viewed as a single hard credit pull.
Everyone’s credit situation is slightly different. The key is to evaluate your current situation and then develop a strategy that works best for you. Using a combination of some of the techniques listed above, you are well on your way to getting a car loan.