7 Tips for Securing Bad Credit Auto Loans
The majority of lenders use our FICO scores when approving a borrower for a loan.
If you have a bad credit score, it can seem almost impossible to get an auto loan, especially one with a decent interest rate.
But don’t lose hope if you’re dealing with poor credit issues. You can still find bad credit auto loans designed to custom fit your situation.
Follow these seven tips to get the best deal possible.
What You Need to Know About Credit Scores
There are three major credit bureaus, Transunion, Experian, and Equifax, that calculate your credit score. Although they each determine your score in a different way, they typically use similar factors to perform their calculations.
Here’s how they evaluate your credit scores.
- 740–850: Excellent credit
- 680–740: Good credit
- 620–680: Fair credit
- 550–620: Subprime credit
- 300–550: Poor credit
Credit Rating Actions That Negatively Affect Your Credit Score
There are a variety of actions that will impact your credit score.
These include late and missed payments, little or no credit history, bankruptcy, loan default, foreclosures, owning no assets to act as collateral and owing too much on other debts.
While it can be a challenge to get an auto loan with bad credit, it can be done. And if you work on your credit a bit, you can even be approved for an auto loan at a decent rate.
Bad Credit Auto Loan Rates Available for Bad Credit
Someone with an average credit score will pay an interest rate between 5 to 6%. But when your credit score is low, you can still pay an interest rate as low as 6.5%.
However, if you’re buying a pre-owned vehicle (a used car) It can cost 13% or higher.
To get the best rate, here are some tips that will help.
1. How to Get a Better Interest Rate
The possibility of getting a better interest rate on a car loan will be more possible if you take these steps.
You can improve your credit rating when you pay your bills on time. In fact, the quickest way to damage your credit is with late payments.
When you pay your bills late it really lowers your credit. You can raise it an entire credit category with on-time payments.
This can make a big difference in the rate your lender offers you. Give yourself a few months to get your credit in better shape before you apply for a loan.
Another thing you can do is to put some money in the bank. If you make a down payment of 20% or higher, your auto lender can offer better terms and rates.
Do some research. Speak to a variety of lenders. Shop around. Since many consumers have average, subprime, and bad credit scores, there are more and more loans being offered at a variety of rates.
2. Find a Cosigner
A cosigner with a good credit score can provide lenders with the extra security they need. Your cosigner will need to sign your car loan and agree to make the payments if you’re unable to make them.
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Your lender will perform a credit check for your cosigner. Their score should be good to excellent to make up for your low credit rating.
3. Don’t Listen to Negative Opinions
Some uninformed people might try to tell you that you can’t get an auto loan because your credit is bad. Don’t listen to them.
Check your own credit report before taking the advice of others. If you have collateral, you may have a better chance of getting an auto loan than someone who doesn’t have any assets with a similar credit score.
You can order your credit report for free and learn your financial history. You can obtain your credit report from a variety of financial institutions and companies, including banks and online credit companies.
Make sure when ordering your report to make sure it comes with your credit score from each bureau.
You can even find mistakes on your credit report that can influence your lender’s decision for approval like this couple. Make sure you know everything that’s on your credit report.
4. Shop Around For the Best Bad Credit Auto Loan
Shop around for the best interest rate. A word of warning: Look out for lenders who specialize in auto loans to subprime credit customers. This is a red flag. These companies usually charge higher rates than traditional lenders.
Start Your Search Close to Home
Before looking for a bad credit auto loan, check with your credit union or bank where you have a savings account or checking account.
Go to your employer or home or auto insurance company and ask if they offer auto financing.
It’s also better to check companies who provide auto loans than lenders who offer loans to low credit consumers.
Aside from your own bank, check with reputable national regional and local banks or established online lenders.
5. Research Loan Terms Vs. Monthly Payments
Some lender will try to show you lower monthly payments on paper and offer them over a long time period.
While at first, it might seem appealing, you could end up paying more than the vehicle is worth.
If the vehicle is more than you can afford for a short-term loan, it could be wise to choose a lower priced vehicle. Remember to shop for loan terms, not monthly payments.
6. Beware of Conditional Terms
Make sure you stay away from financing deals that offer conditional terms before you sign on the dotted line. You want a fixed rate that is final and is not conditional.
Lenders have told buyers a month later that they need to increase their down payment and their interest rate has increased. If they sign for a conditional term loan, they have to pay the higher interest rate.
This is what is called a yo-yo scam. Targets of these yo-yo scams can pay interest rates 5 percentage points higher. Also, watch out for spot-delivery scams.
7. Look Out For Add-ons
Some lenders try to stick nonprime buyers with additional goods and services they don’t need.
Never let the loan to be contingent on buying extra services such as insurance or extended warranties.
The Takeaway On Getting Financing For Bad Credit Auto Loans
Now you have some sound advice and smart tips for securing bad credit auto loans. Work on your credit, do the research and you can get a new vehicle with a reasonable interest rate.
Our company offers advice, tips, and resources to help consumers repair their credit. Visit our website and get your credit in better shape today.
