What are bad auto loans and what to watch out for
Simply put, a bad credit loan is a loan specifically designed for drivers who are in the poor credit bracket – generally defined as a FICO score below 580. To get the best rate when taking out an auto loan for bad credit, it is important to shop around and do some extra research.
What is a bad credit car loan
A bad credit car loan is a car loan — like any other loan — given to borrowers with a low credit rating. Drivers with credit scores around 580 or lower typically have a history of financial hardship and are considered a higher risk of default, and lenders may be hesitant to offer an auto loan with favorable terms for borrowers.
The best ways to find a car loan with bad credit
Finding a car loan with advantageous conditions is not easy. Auto lenders generally prefer to work with drivers with good credit, who are considered less risky.
Find out which lenders offer loans to drivers with bad credit and do your research on those lenders. Then compare the APR and loans from a few different lenders to make sure you’re getting the best deal.
How Bad Credit Car Loans Work
When you have bad credit, you can still qualify for an auto loan. And in many ways, car loans for bad credit work much the same as car loans for drivers of any other credit bracket.
The lender will consider your credit score, income and general financial situation as well as the make, model, age and condition of the vehicle you are interested in. Based on this information, the lender will determine a monthly payment amount that you are allowed to borrow, your interest rate and the length of the loan.
how much can you borrow
Your credit score can have a significant impact on how much you can borrow. Because lenders view borrowers with lower credit scores as riskier, they are often less likely to approve larger loans.
If you’re looking to get a premium vehicle, but can’t get approval for the full amount, it might be worth checking out older model years. Purchasing a Certified Pre-Owned vehicle can remove some of the risk on your part when it comes to buying a used vehicle.
Steps to getting a car loan with bad credit
But just because you have bad credit doesn’t mean you can’t get a car loan. There are steps you can take to improve your chances of getting the best deal available.
1. Improve your credit score
Your credit score plays a huge role in determining the type of loan you can get – and the higher your credit score, the better the terms of your loan.
If you can afford to delay buying your car, take small steps to improve your credit. Paying off existing debts or having monthly utility or rent payments factor into your credit score can help boost your score and improve your application’s appearance.
Don’t forget that you can also check your credit report for errors. You may have to wait up to 30 days for corrections to be made, so it’s worth double-checking before you’re ready to buy.
Don’t just limit yourself to the car dealership. Go to your local banks, credit unions and check online. Check the eligibility requirements for each before getting a quote to ensure you meet the advertised minimum qualifications.
Keep “buy here, pay here” dealers and dealers with bad credit as a last resort. You will likely receive less favorable terms than if you were to apply at an institution where you already have an account.
3. Be prepared to pay more
Because of your credit, you will have to pay a higher interest rate. Apply for prequalification with the lenders you find and compare the rates offered and the total amount of interest you will pay. A longer term means a lower monthly payment, but it also means a more expensive loan overall.
4. Take your time
Taking your time is also important when shopping for your car. Research current listings and compare prices at different dealerships to ensure you’re getting the best deal.
The market is currently difficult, so you may not be able to find your ideal car right away. If you can wait, it may be worth extending the car buying process. Most pre-approvals last 30 days, which means you can take your time.
How to avoid auto loan pitfalls with bad credit
The best way to avoid the pitfalls of a car loan with bad credit is to do some homework before you set foot in the parking lot. And figure out how much car you can afford before you even go to a dealership. Be honest with yourself about your budget and make sure you’ll be able to afford the payments.
Don’t assume you’ll qualify for the best interest rate
The most desirable rates are reserved for borrowers with excellent credit ratings. If you have a credit score in the 500s, you will face much higher rates. If you can put off buying a car, you might be better off working on improving your credit to qualify for a lower interest rate.
Don’t assume every dealership will offer a bad credit auto loan
Some dealerships will refuse to sell you a vehicle if you have bad credit. And don’t count on the fact that all dealerships offer the same financing options: some will have more flexible options than others.
Don’t assume you can’t get help from a credit union
Some credit unions offer car loans for bad credit. You will still need to meet the underwriting requirements set by these lenders, but you may qualify for more favorable terms than you would get from a dealership.
Don’t take the longest term available if you can help it
If you can’t afford the higher monthly payment, you may be tempted to take a longer term. But that means you are forced to pay more interest. Try to pay off the car loan as soon as possible by taking a shorter term.
The bottom line
If you’re looking to buy a vehicle, understanding your credit and what you can expect to qualify for is essential. But it’s not just your credit score that will determine whether you get a loan. The financing options available vary and it is important to shop around.