A car gives you mobility and freedom. In many cases, people’s livelihoods depend on having a personal transportation option. Buying a car is a vital part of today’s economy. There are people who are financially stable enough to buy a car with their own cash. But for many others, purchasing a car often means borrowing money to make that transaction happen. There are many companies that offer car loans these days.
Car loans are very easy to obtain if you have a good credit score. But the process gets complicated if your credit is not good. You could be denied an auto loan for having bad credit or you may end up paying significantly higher interest rates than a borrower who has good credit. The key thing to note is that if you do get rejected by an institution for an auto loan just because you had bad credit, do not get disappointed. There are ways in which you can still get an auto loan and purchase the car which you are so eager to drive. It is also important to know this useful information so as not to get ripped-off or overcharged for a bad credit auto loan.
Tips for buying a car with bad credit
- Get a copy of your credit report
The very first thing that you should do if you are planning to get an auto loan is check your credit report. You should not wait till someone rejects you for an auto loan citing bad credit. You should also not think that looking at the credit report makes sense only if you think that you may have bad credit. Simply order a credit report. There are credit bureaus like Experian, TransUnion, and Equifax that are mandated to give you one free credit report every year if you request. So, get a free copy of the report and go through it. See if there are any negative items that you do not know about. Sometimes, there are errors in the credit report that can affect your credit score without any fault of yours. Sometimes, you may be a victim of identity theft, and suspicious activity in your name could affect your credit profile negatively. At other times, the bad credit may be an outcome of your tough financial situation or bad decisions.
Whatever the reason, bad credit should be understood well in advance before you go and apply for loans. Once you know the shortcomings, you can work towards addressing them. You can clean up things that can be cleaned up and start fixing your credit profile. But if you do not know the details of the negative items, then you will be in for an unpleasant surprise. Another piece of advice, try doing the credit report analysis a few months before you intend to purchase a car via a loan. It will give you a chance to improve your credit if something is indeed broken and fixable.
- Work towards increasing your credit score
Whether you have a poor credit score or an average one, there are many things that you can do to bump up the score. The credit score is absolutely critical in deciding what interest rate you will pay for your auto loan. So, every effort needs to be made to minimize your interest expense by maximizing your credit score. You can do the following:
If your bills were late, start paying them before the due date.
If your credit card spend was close to the credit limit, try to spend less. Being away from the limit is positive and being too close to the limit is negative.
If you are not able to reduce your spending on credit card, request for a limit increase. That will effectively keep you away from the limit and help improve your credit score.
If you found something inaccurate on your credit report, then dispute it with the credit bureaus. This dispute process can take 30 days or a couple of months. So, order reports much before you plan to borrow an auto loan and get started on the dispute process.
Pay off any loans and outstanding debt which is not necessary. Having too many disparate debts scattered around is viewed negatively by credit bureaus. Having as few debt as possible is positive.
If you cannot pay off your loans, try to consolidate them into a single loan. This will not only be positive for your credit score, you may also end up with a lower interest expense every month.
- Select a dealer who has experience working with low credit scores
There is no shortage of auto dealers. But as you explore your car options at various dealerships, ask each one about their experience of working with low credit clients. Do they have tie-ups or relationships with lenders who are willing to work with people who have a less-than-favorable credit score? Once you get their answer to this question, evaluate and shortlist the dealers whom you can work with. Another way to approach this is to first find a bank or financial institution that is willing to lend to customers with a low credit score and then see if they have a relationship with any auto dealer in your city or town. The idea is to get either the dealer or the bank to do the bidding for you.
- Go for a pre-approval to know in advance
Lenders offer what is known as a pre-approved loan. In a pre-approval process, the lender only requires you to provide them with basic personal and financial information. Based on the limited information, they will evaluate whether you are likely to get a loan or have no chance because of your credit profile. If you do have a chance, you get pre-approved and are asked to make a full application. If you have something negative in your credit report, you may not get pre-approved.
The whole idea of doing this pre-approval process is to know in advance whether you will get a loan or not. If you know for sure that you will get rejected, you can begin to work on your credit score and try to improve it. The second benefit of opting for a pre-approval process is what is known as a “hard credit check”. Every time a lender pulls up your credit report, it performs what is known as a hard credit check. This kind of check lowers your credit score marginally. If multiple lenders perform these checks because you applied for an auto loan at multiple locations, then all those hard checks will lower your credit score. A pre-approval process involves no such hard check. There is only a “soft check” performed. Soft checks do not affect credit scores.
So to save yourself from unnecessarily having your credit score lowered, a pre-approval for an auto loan is advisable. Its importance is even more if you happen to have a low credit score.
Final things to keep in mind
Once you have figured out all of the above and are finally ready to finance your car purchase via a loan, following are the things that you should discuss with the dealer and the lender:
Find out how much interest rate you will be paying. The interest rate should be in line with what other lenders are offering and your credit score.
Ask if there is any pre-payment penalty clause in the loan agreement. Pre-payment penalties are charged to the borrower if they pay off the loan early. You would not want such clauses ideally because you are saving money by paying off the loan early.
Ask when you can refinance the loan. Refinancing comes into picture if the loan that you are being offered has high interest rates, and you want to move on to something more reasonable. Normally, if you have a good EMI payment history and you have a decent credit score to go along with those regular payments, then you might be able to refinance the auto loan.
Compare loan terms to interest rates. A 5-year loan might have a higher interest rate than a loan with a term of 4 years or 3 years. If you can afford to, opt for a lower term loan. The monthly outgo might be higher, but the overall cost might be lower.
Keep the cost of the car in check. It is the job of the dealership to upsell you all sorts of added features and accessories. Try not to get talked into buying all those fancy options. It is only going to increase the cost of your vehicle and you will be paying EMIs for that much longer.
Check if the loan on a used car is more expensive than that on a newer car. While you might think that you are saving money buying a used car, check if the cost after loan and interest is still less than the corresponding cost with a newer model.