How To Get A Car Loan With Bad Credit

Don’t Let Bad Credit Keep You from Buying the Car You Deserve

If you have bad credit or no credit, the idea of getting a new car may seem out of reach. Even if you believe that you can get one, often you may compromise your hopes before you start looking, telling yourself that you can’t get one that doesn’t have significant problems or isn’t old. However, that’s not always the case, and this guide explains the step-by-step process to find out your genuine credit situation and what your options are.

How to Identify Your Credit Rating

First, you have to figure out what your credit rating is before you begin the search. This necessary step gives you the starting point for securing your loan for a car by laying out what you need to do. To find your credit rating, you can do the following:

  • The main three credit companies (Experian, Transunion, and Equifax) provide everyone a free credit report once per year. This lists your recorded assets, debts, and other credit-related information, as well as a three-digit number. This number is your credit rating, and it’s an easy shorthand to gauge your credit. Generally, if you have 690 or less, then you have bad credit and should use the steps outlined below.
  • Alternatively, if you currently have a major credit card, look until your “card benefits” on the account website. Many cards from companies such as Capital One and Discover provide a free credit rating. It is not as in-depth as the credit tracking companies’ versions, but it gives you a good baseline.
  • Since each of the three companies provides one free report per year, you can stagger them out every four months to have a detailed report periodically. This method will help you better track your rating over time.

How to Repair Bad Credit

If you have bad credit, don’t worry; many people are in the same position and there are ways out from it. Use the following method to maximize your credit resources:

  • Sometimes, identity theft or creditor errors may cause inaccurate information to show up on your report. In these cases, you should dispute the derogatory reports to improve your score.
  • Pay down your high balances. If you have credit cards that are over 80% used, this is a warning sign for companies that they may want to avoid offering you a loan. Bring those ideally below 30%, even if you have to split the same debt among more cards.
  • If you’ve been consistently paying your utility and phone bills, consider using the Experian Boost feature, which adds them to your credit report. These can offer creditors a sign that you can reliably pay your bills, and potentially increase your score. 
  • Only apply for new cards and loans as you need them. Each time you submit an application for new credit, it causes a “hard inquiry”, which shows up on your report and counts against you. These inquiries don’t cause much harm on their own, but they build up. Each one remains on your record for two years, so use them sparingly.

Finding the Right Car for Your Credit

Once you’ve taken steps to improve your credit, then you can start looking at different cars and finding one that suits your needs. Consider a few points as you start your search:

  • Find a car that suits your budget. You still have to pay for insurance, gas, and maintenance, so it’s easy for car payments on bad credit loans to balloon into a large portion of your income, which can trap you into a cycle of debt, or damage your credit if you can’t make the payments.
  • Look for a reliable car with a track record for inexpensive maintenance. The traditional mainstays for this have been Toyota and Honda, but recently Kia has shown itself to be both reliable and inexpensive. Many car makers produce trustworthy vehicles (and some not-so-trustworthy), so conduct research on individual models to get genuine feedback from those who have owned them.
  • Select a car that has a good safety rating and fuel efficiency. These features will keep your insurance and gas costs low, leaving more money in your pocket at the end of the month.   

Identifying a Good Lender and Securing Positive Terms

After you’ve found the right car for you, it’s time to sort out which financial institution will provide a car loan with bad credit. There are several options for this:

  • Credit Unions – This type of institution is your best option for favorable loan terms, as credit unions are non-profit institutions that offer numerous financial products. If you’re a member of a credit union, you can more easily get the best loan rates for bad credit.
  • Banks – Your next best choice for a loan is a traditional bank. Banks turn a profit, so they tend to charge more in interest on their loans. Nevertheless, you should be able to find a loan with interest between 5-10% APR, depending on your credit and how much money you put down on the car.
  • Other Credit Companies – Sometimes, credit card companies and digital loan companies will finance auto loans. The terms on these loans may vary significantly, as do the companies’ reputations. You should rely first on one of the other two options, as loans from other credit companies may reach as high as 16% APR. 

Once you’ve received a loan offer, consider what your needs are. These loans generally range from 36 to 72 months. The longer the term, the smaller your monthly payment is, but the more interest you’ll pay overall. If you can pay it off sooner, you should do so to save money in the long term. To get a general idea of what your monthly payments would be, you could use our payment calculator.

If you have money or a trade-in that you can use for a down payment, you should do so up-front, to reduce your interest rate and be more likely to secure a favorable loan. Remember that you may want to get a different car in a few years, so plan accordingly. If you pay off the loan in three years, you can use the car as a down payment on your next car.

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