What to Expect from Used Car Dealers If Your Credit Isn’t Great

May 25th, 2018 by

Two green signs on top of one another, one says "bad credit" with arrow pointing left, the other says "good credit" with an arrow pointing right

Credit problems can happen to the best of us when life throws surprises our way. Whether financial challenges result from a period of unemployment, illness, or paychecks just not stretching to cover expenses, they can affect your credit for years to come. But you still need a vehicle to keep working, running errands, and living your life. Before talking to any used car dealers, learn about your credit score.

A credit score of less than 629 qualifies as “low,” and if that describes your score, that means the information in this article will apply to you. If you’re shopping with used car dealers and wondering what to expect when you have less-than-stellar credit, read on. We’ll cover your options and the things you need to know.

How Your Credit Score Is Calculated

Your credit score, or FICO score, is determined by the history of how you’ve used your credit. That may mean your track record (or lack of one) when it comes to credit cards, length of account history, usage of available credit, and new or recent inquiries or accounts opened.

Payment history, whether good or bad, makes up 35 percent of your FICO score. The amount you owe, or credit lines and loans you’ve accessed, accounts for 30 percent. Part of this aspect is the percentage of available credit you are using. The length of your individual credit history and how often you access your available credit makes up 15 percent of your score, and another 10 percent comes from new credit applications or inquiries. The final 10 percent looks at “credit mix,” or how varied your history is among types of accounts, such as cards, loans, mortgage, and more. Of course, the specifics of how your score is calculated will depend on individual factors, such as the length of your credit history and its makeup, but this formula should give you a general idea of what to expect.

How to Improve Your Credit Score

If possible, you may choose to address any aspects of your credit report you can resolve prior to applying for an auto loan. Just be sure that your new information is updated with the credit bureaus after you do so. One method experts recommend for credit repair is to open a secured card and use it responsibly for six months to a year before you apply for an auto loan. A secured card requires a deposit at the time you open the account. Once the account is closed, you’ll be reimbursed for your deposit.

If you’ve had trouble with credit cards before, though, make sure you’re in a position to make your payments reliably and on time, or this strategy may backfire and damage your credit further. If you can’t wait for six months to a year, you still have options. Postponing your used car purchase for even a few months and focusing on paying bills on time can also help raise your credit rating.

How Your Credit Score Affects Auto Financing Options

You can expect your credit score to impact your financing avenues in a few different ways. Because the interest rate you’ll qualify for if you take out a loan is determined by your credit score, you can expect a low credit score to result in a higher interest rate. It works this way because a credit history that’s poorer than average equates to higher risk for the lending company. In addition to your credit history, the lending bank will also consider your income and length of employment at your current job, work history, and the type of loan you’re applying for.

Consumers with scores of 580 or lower may only be able to get approval for loans with 20-30 percent interest. If that’s you, be aware that the interest can add up to thousands, increasing the total amount you’ll pay for your vehicle. You can offset higher interest somewhat by making a larger down payment when you purchase. If your credit score is lower than 540, you may have trouble being approved for any type of auto loan. That means you’ll have to research other options.

Where to Find an Auto Loan

Shoppers have a couple of options as far as where to apply for a loan for a used car. In addition to the used car dealers themselves, you can check with these funding sources: banks, credit unions, independent financing companies, and Dealer Financial Services Group (DFSG). You may choose to check with a few different lending agencies to see where you’ll find the best option for you.

Before meeting with a lender, you can research their auto lending rate sheet to find out the standard rate they offer for applicants with your credit rating. This sheet will give you an idea of what to expect and help narrow down your funding options.

Tips to Keep in Mind

Remember how we mentioned that inquiries would affect your credit score? When you apply for credit, and a lender pulls a copy of your credit report, that’s an inquiry. Each inquiry does impact your credit rating, and too many recent inquiries can bring it down.

Do as much research as you can before actually applying for your loan(s), so you can minimize the inquiries associated with applications for credit. It also helps to keep your applications within a two-week window, so once you’re ready to move, move quickly. Often, all inquiries from auto lenders that fit within this time frame will only count as one inquiry together, keeping your score from lowering too much due to your search.

When you’re considering how long your loan period will last, focus on the total you’ll end up paying instead of what your monthly payment will be. Of course, it’s easier to budget for a lower monthly payment. But in the long run, spreading payments out across five years instead of two or three, for example, will mean you end up paying substantially more in interest. Consider purchasing a less expensive vehicle and opting for a shorter loan period if you can.

This one may seem counterintuitive, but you may end up spending less for your car if you purchase a newer model from your used car dealer. Older vehicles often come along with higher interest rates. This isn’t a no-exceptions rule, however, so do keep your eyes open, as there are some excellent deals available on older-model used cars that can save you money. Used car dealers like McCluskey Automotive have hundreds in stock every day.

If you can find a cosigner with good credit, your interest rate should go down significantly. However, be aware that many people have been warned against cosigning for loans for others. If you were unable to make payments for any reason, the cosigner is as responsible as you are for paying the loan off. Their credit rating will also be affected by late payments or defaulted accounts if they cosign. If you do use a cosigner, repay their trust in you by ensuring you pay on time every time. You’ll want to be honest with your sales representative or lending officer about your credit history, of course. They’ll be running a credit report at some point, after all. However, avoid referring to yourself as “high risk” or seeming desperate for loan approval. Unscrupulous sales representatives may give you a higher interest rate than is really needed if they smell your fear. Bringing a recent copy of your credit report with you when you shop can get everyone on the same page and keep emotions out of the equation.

Armed with what you’ve just learned, you should be ready to start finding out which funding option will be best for you at local used car dealers. Or maybe you’ve decided that a brief postponement to repair your credit history is best. Whatever you decide, take heart. There are plenty of lenders out there willing to work with people whose credit isn’t excellent. And once you find the one that’s right for you, paying off your auto loan in full and on time will pull your credit rating up. Keep this in mind, shop responsibly, and make sure to pay those bills on time—before you know it, your less-than-stellar credit will be a thing of the past.

Posted in Used Car Dealers