How to Buy a Car With a Bad Credit Score
When you need a new car but you don’t have the cash to pay up front, taking out a loan is the next best option.
If you have bad credit, however, that can stand in the way of getting approved.
It also means paying more in interest if you’re able to secure an auto loan.
Financing a new or used car when you have a less than perfect credit isn’t impossible, but it does take a bit of extra legwork to get it done.
If you think your credit score is too low and will stand in the way of obtaining an auto loan, read these before you start shopping around.
Bank Loan
The first place to look for a car loan when you have bad credit is your bank or credit union.
If you’ve been a loyal customer and you’ve always managed your accounts responsibly, you may have a better shot at getting your car loan request approved in spite of having a lower credit score.
The key to figuring out how to get an auto loan with bad credit is knowing what the minimum requirements are to qualify.
Generally, banks and credit unions look at the following things in addition to your credit report and credit score when making approval decisions:
- Income
- Work history
- Monthly housing payment
- Year, make and model of the vehicle
- The amount you want to finance
- Your assets, including your checking and savings account balance
If any of this is discouraging to you, remember this:
Things, like working steadily at the same job for several years, maintaining a steady income, and having a low debt to income ratio, can all counteract any imperfect marks on your credit report.
It also helps if the negative items on your credit report, such as an account sent to collections or a bankruptcy, are several years old.
If you’ve been paying your bills on time consistently since then, that can go a long way towards showing the lender you’re back on the right track.
Overall, here are the pros and cons to trying to obtain a bank loan to pay for a car:
Pros vs. Cons of Using a Bank Loan to Pay For a Car
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A bank auto loan comes straight from a bank or credit union.
When you apply for a bank auto loan, the lender will go over your credit score and financial situation to decide whether or not you qualify for a loan and at what interest rate.
There are two ways to apply for a bank loan:
- You can apply after you’ve found the right car, and hope that you’ll qualify for a loan that’s big enough, or
- You can apply for a bank loan before you start looking at cars, known as a pre-approved loan.
By getting a pre-approved loan, you’ll know how much you can spend on your new car.
Bank Auto Loan Pros
Here's some of the positives of getting a bank auto loan:
Less Expensive
Bank loans are typically less expensive than dealership financing.
By working directly with your lender, you’re cutting out the dealership middle man which lowers the amount you need to pay in fees.
If you work with a bank that you already have an existing relationship with, that can also help you qualify for a lower rate and lower payments.
Lenders prefer to work with existing customers who have been responsible with other loans.
Relationship Savings
Another advantage to using your current bank is that you can link up your auto loan with your online banking.
This makes it easier to track your payments and manage your bills. Finally, getting a pre-approved bank loan gives you a set budget before you go shopping.
This way you know you’ve got financing in place so you won’t run into the problem of finding a car only to realize you can’t qualify for a loan large enough to buy it.
Bank Auto Loan Cons
While bank auto loans are usually better deals than dealership financing, they aren’t always the best.
Personal Loan
If your bank or credit union turns you down for a car loan, consider applying for a personal loan.
Personal loans are offered by brick-and-mortar banks as well as online lenders and they can be used for any purpose, including the purchase of a car.
It’s possible to borrow $10,000, $20,000, or even $30,000 without having to bring any collateral to the table.
If you're wondering how you can get a personal loan with bad credit, the answer is simple:
Online lenders.
Online lenders use the same criteria as banks to qualify borrowers for loans, but getting approved tends to be easier for someone whose credit isn’t exactly stellar.
When you’re comparing online lenders, take a good look at the rates and fees they’re offering.
While they can be more convenient in terms of approval, these loans can also be more expensive, especially if you have bad credit.
Overall, these are the pros and cons of trying to obtain a personal loan to pay for a car:
Pros vs. Cons of Using a Personal Loan to Pay For a Car
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Credit Card
Using a credit card to finance a car can be tricky but it’s something to consider when you have bad credit.
Many car dealers have strict rules on how much you can charge, so this method may work best if you’re only planning to spend a few thousand dollars on a car.
The most important thing to consider:
The annual percentage rate on your card.
If you’ve got an APR in the 20% to 25% range, the cost you pay on the car over time is going to be a lot more than the original price.
Below are some pros and cons to using a credit card to finance a car:
Pros vs. Cons of Using a Credit Card to Pay For a Car
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Find Lenient Car Dealerships
Financing a car directly through the dealership has some advantages and disadvantages when you don’t have great credit.
Generally, on-the-lot-financing is easier to qualify for with a lower credit score because these kinds of dealers specialize in customers who don’t have great credit.
You may also have some wiggle room when it comes to negotiating things like your monthly payments and the length of the loan.
On the other hand, “buy here, pay here” financing is likely to be the most expensive option for someone with poor credit.
Speaking of lenders who sell repossessed vehicles, have you ever noticed those ads on private car dealerships that say, "We Finance Anyone"?
While it's fair to be skeptical of these types of car dealers, they can be a solid option for the car buyer with bad credit.
There is a catch though, and it usually comes in the form of a high interest rate.
Unfortunately, the lower your credit score, the higher the interest rate you'll be offered (sometimes going as high as 20% - nearly the same as what you'd pay on a credit card).
The reason for the higher interest rate is because it serves as a protection for the lender in case you default on your loan.
Some dealers don't stop there though - some even go as far as placing a satellite device on your vehicle to track you down and repossess your car if you're late on a payment.
Just like these types of lenders treat you with caution, treat them with caution as well.
It can be hard to see which ones are reputable and which ones aren't, so evaluate how they treat you and research reviews on them online. Don't sign a deal until you feel that the lender is trustworthy.
Dealers May Be Running Special Promo Deals
Sometimes dealers run special promotions that offer better financing than bank loans. Also, it’s up to you to handle the research with bank loans.
Can't Get Multiple Rates Quickly
If you want to get multiple quotes to possibly find a better rate, you need to handle these applications on your own.
While research is definitely easier on the Internet, it still takes time to collect rates from different lenders.
Financing
When you take out dealership auto financing, you’re applying for your auto loan through your car dealership.
The dealership doesn’t actually loan you the money.
Instead, the dealer will have relationships with a bank or multiple banks who will actually give out the loan.
The dealer just collects your financial info to process your application with the bank.
You’ll handle the application for your auto loan at same time as you go through the paperwork to buy your new car.
Dealership Auto Financing pros
When considering an auto loan from a dealership, these are some of the main benefits you should know:
Convenient
Dealership auto financing is convenient.
You can apply for your car loan at the same time that you’re buying your car.
This saves you the hassle of having to make a separate trip to the bank.
Explore many rate quotes, quickly and easily
Finally, if a dealership works with several different banks, this is a way for you get to multiple quotes quickly.
Dealership Auto Financing Cons
With the good, comes the bad. These are some of the cons of financing your car through a dealership:
Extra Fees or Charges
Dealerships usually charge a commission or extra fee to set up your auto financing.
This adds to the cost of your loan and usually makes the cost of dealership financing more expensive.
Not Always the Best Banks
Dealers work with the banks that they have relationships with which means these aren’t necessarily the banks that have the best deal for your auto loan.
Pros and cons to dealer financing are listed below, but overall this is only an option to consider after you’ve exhausted every other borrowing option:
Pros vs. Cons of Using Dealer Financing to Pay For a Car
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Look for Repossessed Vehicles
Banks and credit unions will repossess a car if a borrower is behind on payments, but if they can't find a way to finance those cars for someone else, then they stand to lose a good deal of money.
The more time a repossessed vehicle spends in their inventory, the more money they lose (especially considering the fact that cars steadily lose value as time goes on as well).
This is good news for the car buyer with bad credit, because the banks and credit unions are more incentivized to get rid of their inventory of repossessed cars.
You can use this to your advantage, enabling you to obtain auto loan financing that you wouldn't have been able to get on a new car.
Go to your local banks, credit unions, and other vehicle lenders to see if they have any repossessed cars for sale.
Chances are they will allow you to finance a car as long as you have steady income and can prove that you'll be able to make the monthly payments on your auto loan.
Your Best Defense: A Large Down Payment
If you're wary of lenient auto lenders or purchasing repossessed vehicles (or simply want to maximize your chances of getting approved for a car loan), then your best defense is saving up the largest down payment you can.
The higher your down payment, the lower your future car loan has to be, the higher your chances are of getting approved.
Remember, when you buy a new car, you also need to either pay for or finance tax, titles, and a loan origination fee.
If you can save enough money to cover those extra costs and make a large down payment, then a bad credit score will be less of a hindrance to financing a car.
Auto Insurance Considerations
Multiple studies, shows that people with an average insurance-based credit score will pay up to 24 percent more for their auto insurance than someone with an excellent score.
Have poor credit?
You can expect your auto insurance premium to increase up to 91 percent -- nearly doubling your insurance costs.
Shopping around for the best rates can be a real pain, especially considering how competitive the automotive insurance industry.
While it is best to choose several different carriers to receive quotes from, make sure you ask each one about discounts that might not have been mentioned on the phone or on their website, including discounts for: multiple policies, multi-vehicle, anti-theft, anti-lock brakes, passive restraint systems, ‘green’ vehicles, safe driver, accident-free, defensive driver, low mileage, military, occupational/industry, full payment, paperless billing, loyalty, early signing and good or distant (out of state) student discounts.
While your insurance-based credit score is largely based on whether you’ve paid your credit obligations on time, your car insurance premium will largely be based on the vehicle your drive, your driving history and the discounts you receive -- so make sure to ask for them!
How to Start Shaping Up Your Credit
While all the options discussed so far can help you obtain an auto loan with less than perfect credit, it's important to simultaneously think about how you can improve your credit over time.
Here are a few things you can start doing now to get on track to better credit and better borrowing options:
Check Your Credit Report
A study done by the Federal Trade Commission (FTC) several years ago showed that 1 in 5 consumers had at least one error on their credit report.
That means we should all be regularly monitoring our credit reports.
There's no reason to pay for an error in the form of a lower credit score and fewer borrowing options.
You can check your credit reports from the three major reporting bureaus (Experian, Equifax, and TransUnion) on AnnualCreditReport.com.
If you find a mistake, initiate a dispute with the reporting bureau showing the mistake so you can get it corrected or removed as soon as possible.
Pay Down Your Debt
A solid 30% of your FICO credit score is based on your credit utilization ratio.
Your credit utilization ratio is the amount of debt you have compared to your total credit limit.
If you’re using more than 30% of your available credit, work on paying your balances down to add points to your credit score.
You could even consider rolling any credit card debt you have into a personal loan through a bank or online lender.
Rolling your credit card debt into a loan will decrease your credit utilization ratio and likely could put you in a position to acquire a lower interest rate on your debt.
Put Your Bill Payments on Autopilot
Payment history makes up 35% of your FICO score.
That means missing payments - even one payment - can have a significant impact on your credit score.
If you struggle to remember to pay on time, set up automatic payments for your bills.
You can even create an alert on your bank account online to notify you when a payment is set to go out.
This small step can score you big points on your credit score.
Avoid Applying for New Credit If You Can
When shopping for a loan, most people want to evaluate all the options they can.
This is perfectly fine if you don't actually apply for all of your options.
Every time you apply for a loan or line of credit, you get a hit on your credit report - and it can impact your score.
That means, when you're shopping around for that car loan, make sure to only apply for the loan you think you're going to want to use so you can protect your credit score.
Consider Becoming an Authorized User
Do you have a loved one that has a solid credit score?
If so, and if you feel comfortable doing so, ask them if they'd be willing to add you to their credit card as an authorized user.
Being added as an authorized user presents no risk to you - you're not responsible for the charges the other party makes on their card.
What it does for you is let you piggyback off of their history with the card, giving your credit score a boost.
As long as they continue to keep their account in good standing, you'll benefit from being listed on the card.
Slow and Steady Wins the Race
None of the tips suggested above will improve your credit score overnight. Nothing can improve your credit score overnight.
However, small changes and new habits you begin to develop today can have a major long-term impact on your score and enable you to become eligible for better borrowing options for all your needs.
The better your credit score, the better your chances of qualifying for the best terms on an auto loan.
