When your credit score seems less than stellar, it can result in a high interest car loan and bad credit. It can also give you double trouble by forcing you to go to a car dealership with bad credit – one of the so-called “buy here, pay here” outlets, or ones that act as dealers and lend you money at high interest rates. .
There is no getting around the problem: a bad credit score and bad credit history can create problems when buying a new or used car. What is good and bad credit? We’ll take a look.
What is a good and a bad credit score?
Good and bad credit scores are determined by the three major credit reporting agencies: Equifax, TransUnion and Experian. These credit reporting agencies track your spending and payment habits and assess your creditworthiness accordingly.
The scoring system culminates in a FICO score, an acronym for Fair Isaac Corporation, a California-based credit analysis company.
FICO scores range from “poor” to “outstanding”.
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very well: 740 to 799
- Exceptional: 800 to 850
According to Experian, about 67% of Americans received “Good” FICO scores of 670 or better in 2020. In 2021, the credit reporting agency said the average FICO score was 714. If your credit score falls below of the “Good” level and if it is affected by factors like the current pandemic, it can be difficult to get a good car loan with bad credit.
But it is not impossible.
Determine what you can afford with interest
There can be impossibilities in life, but getting a car loan if you have bad credit doesn’t have to be one of them. Car buyers with bad credit scores manage to get approved for car purchases all the time. All it takes is some thoughtful planning to get the loan you want and the car you need.
While cars for bad credit exist at “buy here, pay here” dealerships, traditional car dealerships also offer loans with higher interest rates and this is the best option overall (read on to find out why).
Don’t forget that you can also view used cars from a dealership.
Getting auto credit with bad credit requires you to remember the following:
- Higher interest rates. Low FICO scores mean higher interest rates.
- It takes time. Bad credit didn’t happen overnight; repairing it takes time and dedication.
- Keep expectations under control. Match your expectations to your credit history.
This last point bears repeating: keep your expectations in check with your credit history. In other words, it’s not a good idea to want a foreign-built luxury cruiser when your budget and credit rating are more in line with buying a second-owner domestic model that may be a level finish or two below the top of the range.
There will be time for that later.
What to know about car loans and bad credit
Banks and other lenders are in the business of making money with money. This happens by lending to others and charging interest for using the funds. As with most things in life, relationships with banks and lenders are built on trust. Lenders generally trust potential buyers with excellent credit scores and a record of paying their bills on time.
On the other hand, banks don’t trust borrowers with lousy credit as much and hedge their bets by charging much higher interest rates for a car loan. Still, bad credit auto loans do exist for buyers at traditional dealerships. Bad credit loan terms have more restrictions than the other end of the car loan spectrum. Check with your local dealership and inquire about loans by logging on to their auto finance service.
Buying a car with bad credit can be a way to get a better credit score. But it is better not to make a mistake by choosing a vehicle more expensive than what you can afford. Such a case of biting off more than you can chew can harm your future financial well-being.
Another thing to consider is that after about a year of timely payments on your car loan, your credit score will likely improve. As your credit score increases, you may be able to refinance the loan, this time at a lower interest rate.
Tips for getting the best auto loan with bad credit
The number one tip for getting the best car loan is knowing how bad your credit can be. Determining your FICO score is a good start, but it will result from your credit report.
If you can live without a car for the immediate future, do your best to improve your credit score first.
Consider free credit counseling
Take action and consider getting help from national nonprofit credit counseling agencies such as Take Charge America (TCA), a Phoenix-based credit counseling service, or Consumer Credit Counseling Services in Atlanta.
These credit counseling agencies can help people with poor credit by consolidating payments at reduced interest rates. They can help you get back on a sound financial footing faster than if you continued to pay off your debt the traditional way.
Improving your credit before buying a car may not be the exact plan once life gets in the way.
“There are times when it is necessary to buy a car before credit scores can be improved,” says Michael Sullivan, personal financial adviser at TCA. “Keeping a job may require it, or a medical condition may make it critical. A consumer with poor credit can often still obtain credit, but should be careful. »
A co-signer with good credit shows others believe in you, so maybe the lender should too. If possible, check in with a friend, relative, mentor, or someone else who will stand with you in this time of need.
Compare car loan offers and what to look for
In addition to buying a car that meets your needs and means, other factors can help you, especially when comparing car loan offers. Try these tips.
- Avoid “buy here, pay here” dealerships who are in the business of selling you credit rather than a reliable car. With interest rates as high as 30%, you could be digging yourself into a hole. On top of that, your credit score gets no benefit because these types of car sales lots are unlikely to ever flag your payment history, leaving you with no trace of paying bills on time.
- Buy your vehicle from a traditional dealership in place. Traditional dealerships use various lenders that offer more reasonable interest rates for car loans. These interest rates may be higher than someone with great credit will pay, but they will help you build your credit. The loan will help you improve your credit score, provided you repay the loan on time as scheduled.
- Other options, such as a credit union, can help. If you walk into a dealership with a pre-approved auto loan, the dealership will have an incentive to beat that interest rate.
- Bring a bigger down payment. Try to provide the dealer with as large a down payment as possible. The more you pay up front, the less you spend back and hopefully at a more favorable interest rate.
How to check your credit score for free
Consumers can access their credit reports for free. Credit reports are available online from all three credit reporting agencies (Equifax, TransUnion and Experian) as well as at AnnualCreditReport.com.
Upon receipt of your credit report, check for errors and fraud. Wasn’t that you asking for a credit card to be sent to a United States post office box in Sturgis, South Dakota? Or did a payment history belonging to John F. Doe end up in John P. Doe’s credit history?
Once you check your credit history, you’ll know where you stand before you go to a dealership and have to hear what could be bad news from a third party. We went there, we did that and we have the T-shirt, which luckily no longer fits us.
Remember, knowledge is power.
Ways to improve your credit today
Just as your credit history didn’t improve overnight, it will take time to improve. The duration depends on the seriousness of the offenses and your level of dedication. According to Experian, this could take several months to several years, including if you repossessed your last car. Collections and late payments stay on your credit report for seven years, while Chapter 7 bankruptcies stay there for up to 10 years, the credit reporting agency said.
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So it takes patience, effort and some helpful tips.
How to buy a car with bad credit
- Pay all your bills before they are due. Also, be sure to pay all outstanding bills for your accounts. Payment history is an essential factor in maintaining a good credit rating.
- Reduce your debt. Paying off debt improves your financial situation and improves your credit utilization ratio, or the amount you currently owe on any credit card, divided by your credit limit. Keep your credit to debt ratio below 30% of your available credit.
- Check your credit report for errors or fraud. Errors and fraud happen more often than expected and can weigh heavily on your scores. If you suspect fraud, contact your credit reporting agency immediately and put a free credit freeze on your account.
- Contact a free credit counseling service. These nonprofit credit bureau services can help you put a plan in place to get you on the right track (as described above).
- Don’t close credit card accounts. Keep your credit card accounts open. It’s better for lenders that you have more available credit that you aren’t using than a bunch of credit cards with max balances. It also shows that you have discipline, which is a very desirable trait in the eyes of a lender.
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