Simply put, a bad credit loan is a loan that is specifically for drivers with bad credit, usually defined as a FICO score below 580. To get the best rate on a bad credit car loan, it’s important to take a closer look and do some more research.
What is a bad credit car loan?
A bad credit car loan is a car loan like any other loan given to borrowers with a low credit score. Drivers with a credit score of around 580 or lower tend to have a history of financial difficulty and are considered at higher risk of default, and lenders may be hesitant to offer borrower-friendly car loans.
The Best Ways to Find a Bad Credit Car Loan
Finding a car loan on favorable terms is not easy. Car loan lenders generally prefer to work with drivers with good credit who are considered less risky.
Find out which lenders offer loans to drivers with bad credit and do your research on those lenders. Then compare APRs and loans from several different lenders to make sure you get the best deal.
How bad credit car loans work
If you have bad credit, you can still qualify for an auto loan. And in many ways, bad-credit car loans work much the same as car loans for drivers of any other credit category.
The lender will take into account your credit score, income, and overall financial situation, as well as the make, model, age, and condition of the vehicle you are interested in. Based on this information, the lender will determine the monthly payment amount you are approved to borrow, the interest rate, and the term of the loan.
How much can you borrow
Your credit score can have a significant impact on the amount you can borrow. Because lenders view borrowers with lower credit scores as riskier, they are often less likely to approve larger loans.
If you’re looking to get a high-end car but can’t get approved for the full amount, older models might be worth checking out. Buying certified used cars can eliminate some of the risk on your part when it comes to buying used cars.
Steps to get a car loan with bad credit
But just because you have bad credit doesn’t mean you can’t get a car loan. There are steps you can take to increase your chances of getting the best deal.
1. Improve your credit score
Your credit score plays a huge role in determining what type of loan you can get – and the higher your credit score, the better the credit terms.
If you can afford to put off buying a car, take small steps to improve your credit score. Paying off existing debts or getting monthly utility or rent payments that count towards your credit score can help improve your score and make your application more attractive.
Don’t forget that you can also review your credit report for errors. You may have to wait up to 30 days before any fixes are made, so it’s worth checking ahead of time before you’re ready to buy.
2. Shop around
Don’t limit yourself to a car dealership. Go to your local banks, credit unions and check online. Before you get an offer, check the eligibility requirements for each one to make sure you meet all the minimum eligibility requirements that are advertised.
Save the “buy here, pay here” dealers and bad credit dealers as a last resort. You will most likely receive worse conditions than if you were applying to an institution where you already have an account.
3. Be willing to pay more
Because of your loan, you will have to pay a higher interest rate. Apply to prequalify with the lenders you find and compare both the rates offered and the total interest you will pay. A longer term results in a lower monthly payment, but it also means a more expensive loan overall.
4. Take your time
Taking your time is also important when you are buying your car. Look for current listings and compare prices across different dealerships to make sure you’re getting the best deal.
The market is currently tough, so you won’t be able to find your perfect car right away. If you can wait, it might be worth stretching out the car buying process. Most pre-approvals last 30 days, which means you can take your time.
How to avoid the pitfalls of a bad credit car loan
The best way to avoid the pitfalls of bad credit car loans is to do a little homework before stepping into a car park. And determine how many cars you can afford before even visiting the dealership. Be honest with yourself about your budget and make sure you can afford the payments.
Don’t Think You’ll Claim the Best Interest Rate
The most desirable rates are reserved for borrowers with excellent credit history. If you have a credit score of 500, you will be facing much higher rates. If you can put off buying a car, you might be better off working on improving your credit history in order to qualify for a lower interest rate.
Don’t assume that all dealerships will offer bad credit car loans.
Some dealers will refuse to sell you a car if you have bad credit. And don’t count on all dealerships offering the same financing options: some will have more flexible options than others.
Don’t think you can’t get help from a credit union
Some credit unions offer auto loans with bad credit. You will still have to meet the underwriting requirements set by these lenders, but you can qualify for better terms than at a dealership.
Don’t take the longest time available if you can help.
If you cannot afford a larger monthly payment, you may be tempted to take a longer term. But this will mean that you have to pay more interest. Try to pay off your car loan as soon as possible, taking a shorter term.
If you are looking to buy a car, it is very important to understand your credit history and what you can expect. But it’s not just your credit score that will determine whether you get a loan. Available funding options will vary and it is important to look at them.