If you have bad credit, financing a used car is still possible. The most important aspect of getting a car loan with bad credit is researching your options to find a loan that best meets your needs, regardless of your credit score. Here are a few tips to help you finance a car even with a low credit score.
Check Your Credit Score
Before you shop for an auto loan, check your credit score. If your score falls at or below 580, it is considered poor. Your credit score takes into account the amount you owe, the length of your credit history, and your payment history. Consistently spending more than your available monthly credit, not making payments on time, and having a short credit history can all affect your credit score negatively.
To improve your credit score, pay off any late or missed payments or delinquent accounts. Also, reduce your debt as much as possible. This puts you in a better financial position when you apply for a car loan and improves your credit utilization ratio — this refers to the ratio of your credit card balances to your credit limits. Financial institutions recommend keeping your utilization ratio below 30% or, for the best scores, under 10%.
Save for a Down Payment
If you have a poor credit score, making a down payment on a used car can increase your chances of getting approved for a car loan. It can also offset higher interest rates due to a poor credit score and can reduce your loan-to-value ratio, which can help you get better terms.
Know What You Can Afford
Before you apply for an auto loan, find out what monthly loan payment you can afford, as this can help you choose a car in your price range. Also, research what annual percentage rates (APRs) — the total amount of interest you pay each year — are common among car lending institutions. With a poor credit score, you will likely receive a high rate.
Research Car Lenders
If you have had trouble getting approved for a car loan from traditional lending companies, look for lenders that focus only on helping borrowers with poor credit scores. While these lenders usually offer loans at higher interest rates, they can help people with low credit scores who need to get a vehicle in a pinch.
Consider Having a Co-Signer
Another way to increase your chances of getting approved for an auto loan is by having a co-signer. When a co-signer applies for an auto loan with you, they’re essentially telling the lending institution that if you don’t repay your debt, they will.
Because the lending company has someone else to go to if you fail to repay your loan, there’s less risk involved and you are more likely to be approved. With less risk, the lending company might also offer you a lower interest rate. Keep in mind, however, that this new debt appears on both your and your co-signer’s credit reports. This means any late or missed payments could affect both your scores negatively.
Pre-Qualify With Lending Institutions
Pre-qualification allows you to determine if you will qualify for an auto loan before you apply. With pre-qualification, you can save a lot of time in applications and avoid multiple hard credit checks that can negatively affect your credit score. If you already have poor credit, it’s always worth pre-qualifying with a few lending institutions to compare the terms and rates you qualify for.
Be Sure the Loan Terms Are Final
If you finance a car through a dealership, make sure the terms are final before you agree and sign the paperwork. If you don’t, you could face increased down payments or higher monthly payments in the future. It’s known as a “yo-yo” scam, in which dealerships tell you their financing isn’t complete and you must accept a higher interest rate.
Consider a Buy-Here-Pay-Here Car Dealership
A buy-here-pay-here dealership not only sells cars but also acts as the bank by providing in-house financing. The decision to approve the car loan application is made by the same company that is making a profit from the car sale, so they are usually more flexible in providing financing to people who have poor credit scores.
Although this type of car financing might be good for people with poor credit who need an auto loan quickly, its interest rates are usually much higher than other lending institutions. Also, if you miss payments, the chance of the vehicle being repossessed is higher.
Look for a Second-Chance Car Loan
A second-chance car loan gives people with poor credit a second chance. If you have been rejected for a traditional auto loan, a second-chance lending company will try to give you finance options you’re almost guaranteed to get approved for.
Although a second-chance car loan is a good option for people with poor credit, it also has certain red flags that reduce its appeal, such as higher fees and interest rates.
Check With a Credit Union
Credit unions are known to offer car financing with low-interest rates and good terms. They are also known for working with people who have bad credit.
Before you head to a car dealership, check with a credit union to see if you can get a preapproval for a car loan. You can start with the one that’s associated with your employer or a professional association to which you belong.
Keep in mind, however, that your location, employer, or other organizations you’re affiliated with can restrict your membership to certain credit unions. If you’re not sure if you’re eligible for a membership to a particular credit union, reach out and ask for information about its requirements.
Contact Rydell Outlet in Grand Forks
If you are looking for a car dealership in Grand Forks, North Dakota, look no further than Rydell Outlet Center. We can help you find a used car that best fits your lifestyle and personality. Don’t hesitate to call us at 701-757-6140 or contact us online with any questions you have. Our representatives are happy to help — we’re looking forward to seeing you soon!
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