Did you know that the average cost of a used car is around $20,000?
Of course, once you’ve thought about getting a new car, you can assume that you’ll be paying a hefty down payment and will be taking a car loan. However, the tricky thing is that most lenders will prefer borrowers with high credit scores.
So, if you have what’s considered a “bad” credit score, then you’ll want to explore your car loans for bad credit options. Yet, the process of exploring the different car loan rates and getting the best car loan interest rate for your needs can be quite simple.
Keep on reading for our full breakdown of getting the best car loans and auto finance options, regardless of your credit score quality.
Car Loans for Bad Credit 101: How Do Auto Loans Work?
The first thing you should be aware of is that car loans are considered secured loans. This implies that you will lose your driving privileges if you don’t make your vehicle payments on time.
When you apply for a loan with a lender, you will be required to demonstrate your capacity to repay the loan and provide the lender with access to your credit history and other financial information.
Don’t be taken by surprise by the procedure. Preparation begins with gathering all of your essential financial information — pay stubs, current loan, and asset information — to ensure that you are fully prepared.
Whether you go via a bank, credit union, or internet lender, you’ll get a lump amount of money to go toward your vehicle purchase after you’ve been accepted. Then, throughout the course of the loan’s duration, you repay the lender with interest on the money you borrowed.
The loan amount, loan duration, and annual percentage rate (APR) will all influence how much you pay each month. Once you’ve determined your monthly payments, you should create a budget to ensure that you don’t fall behind.
Making your payments on time can help repair your poor credit and increase your chances of being approved for a refinance. If you refinance your car loan, you may be able to qualify for a reduced interest rate as well as modify your monthly payments.
How to Get the Best Car Loan Interest Rate
When determining whether or not to accept a person for a vehicle loan, lenders evaluate a person’s credit score as one of the criteria. If a credit score falls below 670 on the FICO® Score range, which ranges from 300 to 850, it is deemed fair or bad, respectively.
Even while you may not be qualified for all loans with this credit score—and you may have to pay extra for the loans you are eligible for—with careful preparation and study, you should be able to find one suitable for your circumstances.
Of course, you can take a shortcut and check out Plenti and the offered car loans.
Here are some strategies you may use to increase your chances of being accepted while also lowering the amount of money you’ll have to pay back in interest.
Know Your Credit and Aim for Improvement
Before making a large purchase that may need a credit check, it’s always a good idea to obtain a free copy of your credit reports and score. You’ll be able to predict what a creditor will look for when assessing your credit by doing so.
When you check your credit score ahead of time, you may make changes and perhaps improve your scores before applying.
Improving your credit score may enable you to get better conditions and a cheaper interest rate, saving you money in the long run.
Set Up a Budget
When buying a vehicle, there are two main factors to consider: the amount of money you’ll need for a down payment and the cost of owning the automobile every month.
Calculating your monthly cost, including your loan payment, insurance, petrol, and maintenance, is an important initial step in the vehicle-buying process, since it determines how many cars you can afford. The greater the down payment and monthly payment, the more costly the vehicle will be.
Secure a Down Payment
A down payment is usually required when purchasing a vehicle. This contribution will go toward purchasing your car, with the remainder of the purchase price being financed and repaid over time.
The more money you put down on a vehicle, the cheaper your loan amount—and monthly payment—can be. A bigger down payment also lowers your lender’s risk, which may help you get a cheaper interest rate on your loan and save you money in the long run.
Because saving for a down payment isn’t always simple, you may want to put off buying a vehicle until you can afford a bigger one. This may help you become a more competitive candidate, reduce your debt, and lock in a cheaper interest rate.
When a lender examines your credit and financial information, they will tell you how much of a loan they are willing to offer you. This should give you a better sense of what you can afford and alleviate some of the stress of not knowing whether or not you’ll be approved for a certain vehicle.
You may utilize a record of your preapproval to negotiate a reasonable purchase price after you have a preapproval letter in hand. It will not only help you understand which cars are in your price range, but it will also help you understand which vehicles are in your price range.
Do Your Research and Shop Around
When you’ve gotten your affairs in order and are ready to apply for a loan, it’s a good idea to shop around first.
If you’re having difficulty accepting a loan from a traditional lender, check into lenders that specialize in helping individuals with poor credit. These lenders may charge higher interest rates, but they assist people with bad credit to be accepted for loans.
You may wind up applying to several lenders in your quest for the finest conditions and lowest interest rate. As previously stated, a hard inquiry is noted in your credit reports each time a lender examines your credit because you’ve applied.
However, by applying with several car lenders over the course of two weeks, these queries are consolidated into one.
Exploring Different Car Loan Lenders
Before you apply for a vehicle loan, you should familiarize yourself with the different borrowing choices available to you.
Some lenders will lend to someone with bad credit, while others will refuse. Knowing how each lender operates ahead of time may help you save time and effort throughout the application process. The most frequent kinds of car finance are as follows:
This kind of financing is arranged and managed in-house by the manufacturer. That means you’re not only purchasing a vehicle from a dealership, but you’re also financing it with them.
When it comes to secondhand cars, this kind of financing isn’t always a possibility. Captive lenders may be lenient and have the interest to give you a loan to purchase their vehicle, so these loans may be simpler to get for someone with less-than-perfect credit.
In this case, the dealer works with various lenders to locate and get a loan for your car. Following your application, you may present various loan choices from which to choose the one with the best terms.
This option may benefit someone with fair credit since your information will be shared with many lenders at once, including at least a few who will accept applicants with poor credit histories.
Credit Union or Bank
Banks and credit unions may be able to help you finance your car purchase.
You would apply with a lender and get a preapproval, which you would then take to the dealership, just like any other loan.
This loan is repaid monthly straight to your bank or credit union. This may be an excellent choice for individuals who already have a bank or credit union connection. Since they may ignore flaws in your credit history and use your experience with them as proof of your trustworthiness.
If you cannot visit a branch, you may apply for many bank loans online by searching for car loans on bank websites.
Auto loans are now available from online banks and fintech (financial technology) firms. The application procedure for these loans is usually completed entirely online. And, interest rates vary greatly depending on the lender.
To locate one of these deals, do a broad internet search for car loans, focusing on businesses that operate entirely online. You may also utilize a single aggregation website to get several loans offers using a single application.
Just be cautious of unknown businesses. Do your homework to see whether the lender you’re considering is trustworthy and providing a good price.
Deciphering Bad Credit Car Loans
We know that having bad credit can seem like a trap that you can’t escape. But, we hope that our guide has shed some light on the different options you have when it comes to car loans for bad credit.
And, if you’re still looking for additional personal finance tips and strategies, we’ve got you covered. Check out our blog articles. All of those will be available in our finance and lifestyle sections.