A car is essential to recovering from economic hardship or gaining solid financial footing. But tough times often lead to people having a poor credit rating. Bad credit, in turn, makes getting a car loan seem intimidating.
It is possible to get a car and bounce back to financial stability, even with poor credit. A variety of lenders and dealers take applications for bad credit auto loans. Getting one and paying it on schedule can even lift your credit score. But before you rush out to apply, it is best to do the work of managing your finances and shopping for the best car loan you can have on poor credit.
Understand Your Credit and Financial Situation
Before taking out an auto loan, you should assess your financial situation. By doing this, you avoid digging yourself deeper into a hole of debt that would be harder to get out of. Here are three simple steps you should follow:
1. Understand Bad Credit
Bad credit means that you have a low credit score. Institutions compute your credit score based on five factors. These are: payment history, amounts owed, credit history length, credit mix, and new credit. You can use this to assess how you got your bad credit. For example, if you have delinquent debts, it is a good idea to factor in how you can repay that in addition to getting a new car loan with bad credit. It might be financially wiser to improve your credit score first before getting a loan. A better credit score means lower interest rates.
2. Review Your Financial Situation
Look at how much you earn monthly and compare it to your expenses. This gives you an idea of how much more debt you can afford. This information will also help you shop around or work with your bank to get the best car financing for your needs.
3. Set a Budget
Dealerships will always try to lure you to a shinier, more expensive car. You can avoid that trap by setting a budget based on your financial situation. Consider extra expenses beyond paying for the car loan: gas, insurance, parking, and other fees. Remember, the goal is not only to have a car but to have financial stability.
Get Rid of Bad Credit
After assessing your financial situation and planning for your purchase, you can put in a little effort to improve your credit score. These few extra steps might lower the interest rates on your car loan.
1. Review and Correct Your Credit Report
Check your credit report and look for errors. Check for any debts you have paid but listed as delinquent. You may also see if there are any accounts that you have not opened, as these might be a red flag for fraud or identity theft. If you find any errors, you should dispute these by sending a letter to the credit company.
2. Get Back to Good Credit
If you have time before you buy your new car, work on improving your credit score. The critical task is repaying the debts that you owe on time. By improving your payment history, you might lower the interest rates on your car loan.
Shop for Car Loans
You now have a budget and a proper assessment of your financial status. You’ve worked hard on improving your credit score. The next step is to shop for car loans. Car dealerships will give you their financing option. Do not accept it right away, as it is likely that there are better auto loans for people with bad credit.
1. Find a Co-signer
Before you shop around, it’s best if you can look for someone willing to co-sign your loan. If you find a co-signer with good credit and regular income, you increase your chances of having a loan approved. You might also get better interest rates.
2. Shop Around, Choose the Best
It is best to compare loans instead of going for the first one you see. Talk to your bank or credit union, especially if you already have a relationship with them. Ask them to process a preapproval, which will give you an idea of how much the bank is willing to lend and at what interest rate.
The data you got from your preapproval serves as the baseline as you look at other financing options. Shop online and look at banks, credit unions, and online lenders. Your own choice of financing opens opportunities to get deals at private party sales and car auctions. Keep your budget in mind as you shop.
Finally, avoid no-credit no-check loans. Even if these look convenient, their extremely high interest rates and other fees will trap you into debt and worsen your credit score.
Drive Your Way to Good Credit
Getting an auto loan with bad credit is possible. Once you get a car, you’re on your way to better financial opportunities. This means better debt repayment, better credit scores, and a better economic situation.