Car Financing for Bad Credit (How to Buy a Car with Bad Credit)
Can you qualify for any type of car purchase if you have poor credit? You might think you’re out of luck if you have a less-than-stellar history of paying bills on time. If you have bad credit, car financing might require some extra work, but you can still qualify to purchase a vehicle. Follow some of these tips when trying to finance a car while dealing with bad credit.
Check Your Credit Score
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Before you venture into the car dealership, arm yourself with information regarding your credit score, which is a number that can range between 300 and 850. A poor credit score typically lands between 300 to 579, while the fair category ranges from 580 to 669. Good credit scores include 670 to 739, while scores from 740 to 799 are deemed very good. Exceptional credit scores are between 800 and 850. To a lender, the number represents your likelihood to pay off the money you borrow. Your credit score reflects several key aspects, including:
- Your history of on-time payments.
- The amount of available credit you have.
- The amount of credit you currently use.
- Your credit’s age.
- The number of inquiries about your credit.
By law, you can obtain one free credit report every 12 months from Equifax, Experian, or TransUnion. Checking your credit report can tell you exactly where your scores fall from excellent to poor. Be wary of checking your credit report often, though, because making numerous requests will lower your score.
Potential lenders use the credit scores not only to determine if you qualify for a loan but also to set the specific terms of the loan. These terms might include the total amount of money the lender will loan you, the interest rate, the required down payment amount, and the loan’s length.
If you don’t need to purchase a vehicle immediately, take steps to improve your credit score, such as paying off your bills on time, reducing your debt, and removing any inaccuracies you might find on your report.
Choose a Less Expensive Vehicle
Even if you have your sights on the top-of-the-line vehicle on the market, you may need to settle for a less expensive car for the time being. The cheaper the purchase, the easier it might be to secure car financing. Once you begin to make payments on the less expensive vehicle, your credit score should improve. That way, you can trade up to a newer vehicle over time.
When deciding on a vehicle to purchase, make sure you can afford it. It’s best to keep your total car expenses less than 20% of your monthly income before taxes. In addition to the auto loan payments, these expenses include insurance, tolls, gas, and parking costs.
Secure Money for a Down Payment
Bringing in a substantial amount of money for a down payment can help lower your monthly payments. The down payment reduces the amount of money you need to borrow, called the loan-to-value ratio. That means you will have smaller monthly payments and a lower overall cost. You could also secure a better interest rate by putting down a deposit. Even with poor credit, having a down payment might convince a lender to give you the car loan.
Although many dealers would prefer that you bring in a 20% down payment, you could probably bring in at least 10% or put $1,000 down, whichever is less. The dealer is banking on you not wanting to risk losing your invested money and car by defaulting on your loan.
Another benefit of putting money down is that you reduce or get rid of negative equity, which is when you owe more money than the car is worth. When you purchase a vehicle, the negative equity involves additional fees such as licenses, taxes, and depreciation from driving the car off the lot. Putting down at least 10% should protect you from negative equity when purchasing either a used or new vehicle.
Trade in a Vehicle
Bringing a trade-in might help you when financing your newer vehicle. This option is similar to bringing in a down payment. Trading in a vehicle can lower the principal loan amount needed to purchase the car, and it shows the lender that you’re committed to the deal. It also helps you avoid the hassle of trying to sell the car on your own. The value of your trade-in vehicle depends upon several factors, including its age, overall condition, and the number of miles.
Consider a Cosigner
Bringing along a cosigner when you’re ready to purchase a vehicle might help the application process. It also might help you secure a lower interest rate. By signing the car loan contract with you, the cosigner agrees to take on the debt if you don’t. If you miss a payment or fail to pay the loan back in full, the cosigner has a responsibility to repay the loan.
It’s important to select a cosigner who has good credit, and the only way a lender can verify that is by looking at the cosigner’s credit report. The cosigner will also need a reliable income as both you and the cosigner will need enough income individually to cover the loan payments.
Because the lender has another person to reach out to if you default on the loan, the risk decreases since two parties agree that the loan will be paid. Remember that this new debt appears on both credit reports, and any missed payments can impact both scores.
Don’t let the possibility of financing a car with bad credit deter you from the vehicle of your dreams. At family-owned #1 Cochran, we can help you secure car financing. Bad credit or good credit, we can get you qualified. You can also check out our Path Program, which allows you to get the approval you need on a brand-new vehicle and gives you a rebate to help with the down payment. Stop in today to check out our large inventory of vehicles and speak to someone about financing options.
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