How to Get an Auto Loan With Bad Credit
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’ve got 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 tips before you start shopping around.
Option 1: 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:
- 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:
- You may be able to get a better APR or a discount on fees if you’re an existing customer
- Approval may be easier if your account is in good standing
- The application process may be more rigorous
- It may be more difficult to negotiate the terms of the loan
Option 2: 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:
- Lending limits are usually generous
- Borrowers with low credit scores can typically qualify without having to put up collateral
- APR for loans can go as high as 36%
- Some lenders charge an expensive origination fee
Option 3: 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 (aside from whether you have enough available credit to complete the transaction) is 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:
- Convenient; there are fewer hoops to jump through for approval
- The minimum monthly payment may be lower than a loan
- Some dealerships won’t let you use credit cards to finance a car purchase
- It may be hard to obtain a high enough credit limit to seal the deal
Option 4: Dealer Financing
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. The APR for this kind of loan can be sky high and the loan itself may include pricey hidden fees.
Not only that, but you may need to bring a larger down payment before the dealer will play ball. 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.
- “Buy here, pay here” financing is easier to get approved for with bad credit
- You may have more flexible payment options
- Dealers may charge much higher interest rates and fees
- You may be required to put up a larger down payment
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. Why not start on making that happen today?