How to Buy a Car if You Have Bad Credit
As the old saying goes, “Misery loves company.” When it comes to bad credit, you’ve got more company than you likely realize.
An alarming number of American consumers have low credit scores, impacting their ability to secure financial loans. Recently, The Washington Post reported that one-third of Americans with credit had at least one debt reported to a collections agency.
If you’re one of those people, or if you’re concerned that your credit is not as strong as it could be, you’re probably wondering how you’ll be able to finance a car.
Fortunately, there are options available beyond bad credit auto loans. You can secure a legitimate auto loan even with less than stellar credit.
Once you’ve done so, you can start taking steps to clean up your credit and improve your overall score, making future auto loans more attainable and easier to manage.
But how? The process is easier than you might think.
Knowledge is Power
Before you even consider shopping around for an auto loan, it’s crucial that you know your credit score. Accessing this number is simple.
Federal law requires that credit reporting agencies like Equifax, Experian, and Transunion, provide you with a copy of your credit report once a year, free of charge. Access your annual credit report online and carefully review the information provided by all three agencies.
Read the Fine Print
By accessing your report, you will receive your numerical credit score, but also your entire credit report, which details your credit history. While it may be tempting to just know your number and move on, it’s imperative that you understand what that number means, and where it came from.
This will require you to review your credit history carefully and look for any disparities or errors in the report. These errors will negatively impact your score, so it’s important that you take the time to ensure the accuracy of your report.
If you do find errors, there are online tools available to help you correct them, and hopefully improve your score overall.
Decoding the Numbers
So, you’ve reviewed your report for inaccuracies and you have your credit score in hand. What does that score mean?
Here is a general breakdown of what those numbers represent. If your credit score falls somewhere in the 781-850 range, congratulations! You have excellent credit and will have absolutely no problem securing an auto loan with a low interest rate.
Same goes for those scores which fall between 661-780; anything between those two numbers signifies “good” credit.
Below 661, things start to get a little dicey. This is in part because lenders have become stricter about which scores qualify for financial loans.
So, while a “fair” credit score between 601-660 might not sound bad, you might not get a loan if the lender has a cut off number higher than 660. Any score between 501-600 is considered “poor,” while below 500 is “bad,” or “subprime.”
It’s hard to improve a bad credit score if no one will give you an auto loan as a subprime car buyer. How can you establish good credit if you’re not given the chance?
It is possible to break what can feel like a relentless cycle, provided you do your homework and take some proactive steps to rebuild your credit. The right auto loan can actually provide you with the perfect opportunity to do so.
Slow and Steady
The good news is, even bad credit is fixable. You can certainly push your score to a higher number, with time and patience.
In fact, Steve Bucci of Bankrate.com who is also the former President of the Consumer Credit Counseling Service of Southern New England suggests, “You really should look at bad credit as a temporary problem…Bad credit doesn’t have to stay bad forever.”
While this is reassuring, depending on your credit score, it may be best to delay your request for an auto loan. If you can hold off for a bit, redirect your focus to paying all of your monthly bills on time, particularly any to do with existing automotive loans.
Most consumers can boost their credit scores between one to two years time. Granted, if you need a car now this plan might not be ideal.
In that case, shop around for an inexpensive car and ask your dealership about a short-term, two or three year loan. This will likely require that you make higher payments, but if you can, do so.
Once your credit recovers you can refinance for a loan agreement with lower interest rates or purchase a better vehicle.
Use Your Connections
In general, it’s a good idea to approach those financial institutions with which you already have a relationship for help with your auto loan.
Depending on how long you’ve worked with a particular financial institution, your lender will likely be aware of events in your life that contributed to your credit situation.
Changes in your job, health, divorce, college tuition, all potentially impact your credit report. Working with a lender who is aware of these events will help establish a clearer picture of your overall credit score.
Avoid doing business with scammy “no credit, no problem” lenders who are just looking to capitalize off your shaky credit. These outfits are quick to offer loans with very high interest, possibly leading to default and immediate repossession of your vehicle, from which they also profit.
Think Outside the Box
There are other resources available to you which might help alleviate the stress experienced when trying to right your financial course. Community Development Financial Institutions (CDFIs) are nonprofit lenders certified by the United States Treasury, that offer personal loans.
If you’re interested in applying for a personal loan through a CDFI, click here to find the CDFI nearest you. Once you feel more secure when it comes to understanding and improving your credit, you can start browsing for the right car.
Even if you’ve made some significant strides toward strengthening your credit and managing your financial obligations, you’ll want to browse a dealership’s inventory with realistic expectations.
You are in recovery mode after all, and should resist purchasing above what you can reasonably afford. Even if you qualify for financing above what you had expected, know your target monthly payment and keep it in mind so that you can boost your credit and your confidence as well.
No one likes the feeling of being on a sinking ship and when your finances have run amok it can feel like you’re drowning. Avoid this by considering only those vehicles which fall well within your comfortable monthly payment range.
A lower-end car will require lower payments and the money you save can be allocated to savings or satisfying other debts, which will bump up your credit score even more. Although bad credit is less than ideal when it comes to auto loans, you do have the power to fix it and re-secure your own financial footing.