How to Finance a Car With Bad Credit

car loan

There's a lot to consider when preparing to buy a car, not just price. Other important factors include finding a lender and finding a car that will last for years to come. This is becoming more critical than ever as people are now driving their cars for an average of 11.4 years, according to IHS Automotive.

That said, how you're going to pay for the car can clearly be a deal breaker - and if your credit score is low, you may have trouble obtaining an auto loan. While saving up a large down payment is always going to be your best defense in a situation like this, there are other options. Here's what to do if you're in the market for a car but fear your credit score is too low for an auto loan.

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.

Find Lenient Car Dealerships

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.

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.

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