If you are thinking about buying a car with bad credit you might need to temper your expectations. Purchasing a used low-margin vehicle for a reasonable price is the best strategy for a subprime buyer. Have realistic expectations and try doing business with a used car dealership that has financing programs available for buyers with bad credit. In addition to getting a nice set of wheels if you make all your payments on time you will climb out of the financial abyss and improve your credit score.
How to buy a used car with bad credit in 3 steps.
If you are thinking about buying a car with bad credit you might need to temper your expectations. Purchasing a used low-margin vehicle for a reasonable price is the best strategy for a subprime buyer. Have realistic expectations and try doing business with a used car dealership that has financing programs available for buyers with bad credit. In addition to getting a nice set of wheels if you make all your payments on time you will climb out of the financial abyss and improve your credit score.
Step 1. Know your credit score.
Most Americans have credit histories at one of the three bureaus — TransUnion, Experian or Equifax. Your credit score is a number somewhere between 300 and 850. It is a measure of your trustworthiness as a borrower or credit risk. Your score affects a lot of things, including the interest rate, insurance rate, amount of available credit and your ability to borrow money in general. You could have several credit scores with different bureaus, but most lenders pay attention to the FICO model, which you can use to check your credit score online.
Other ways of knowing your credit score include checking your loan statements, asking a non-profit counselor for help or getting a free annual credit report from the only government-authorized source.
Step 2. Consider your car buying options.
You’ve checked your credit score and it is lower than 600. It means that the loaners consider you to be a higher-risk borrower. And if you have to buy a car, you shouldn’t be thinking about getting the fanciest set of wheels, you should be thinking about your budget. Look at the total cost of the car ownership, which includes loan financing, maintenance, auto insurance, gas and parking.
There are several car buying options:
- a lower end trim car without extra features,
- a car model from previous years,
- a used car, especially if the dealership has reasonable below the market offers,
- a certified used car, which comes with a better warranty.
It’s generally better to buy a used car from a dealership, since getting a car from a private seller is much riskier. And you certainly shouldn’t be looking for the cheapest car on the market, as the old rusty clunkers tend to come with an enormous cost of ownership, guzzling gas and breaking down every five minutes. Compare the prices and look at the selection of available models on a reputable used car dealer’s website before you go shopping.
Step 3. Work out a deal.
You are zeroed in on the car you want to buy. Now you have to overcome your bad credit score. The best way to do it is by making a sizable down payment combined with providing proof of your earnings. If you can’t show that you have sustainable income, even a good credit history won’t help much. Remember, you have to convince the lender that you have the intention and the means of repaying your loan in full and without delays.
A larger down payment helps you get better terms on the deal. Sometimes making a down payment is the only decisive action that gets the deal closed. For example, if you consider buying a used car for $10,000, a down payment as low as 10% or $1,000 could be the difference between a deal or no deal. A used car dealer generally can provide you with a loan that requires no down payment, but it will be for a smaller sum and with a larger interest rate. Paying even a little money upfront is your best strategy.
Your credit score and your earnings will also influence the conditions of the sale and the dealer’s inventory available to you. With a score of around 500 your monthly income should at least triple the monthly loan payment and you will have to put down about 10-15% of the loan value. The lower your score, the more stringent the conditions of the sale become. With a score well below 450 you will be looking at a 45-50% down payment and your combined monthly earnings (probably including your cosigner) have to overlap the payment 4-5 times and more.
Trading in a vehicle you currently own can also help you shave hundreds and thousands of dollars off your car loan. The dealer will appraise the car for its value and offer you a trade-in price. If you agree to the trade-in price, it will be subtracted from the loan for a car you plan to buy. Of course, you can sell your old car for cash but you are more likely to get better options with the trade-in.
If you have exhausted other options, consider finding a cosigner for your loan. It should be a person who trusts you enough to put their neck on the line for you financially. An impeccable credit score is a must, but even if your cosigner has an average score, it might swing the deal. Don’t forget that a cosigner becomes financially liable for your loan. You should never miss or delay your payments, otherwise you will risk jeopardizing the relationship with your cosigner, who is most likely a close friend or a family member.
If the loan application for your choice car gets turned down, pay attention to other vehicle options that the dealer might have in their inventory.
Remember:
If you are looking for a bad credit car loan, no money down option, you should consider trading in your current vehicle, having a cosigner vouch for you, or accepting a loan with a higher interest rate if it’s available. If you think about expanding your options, don’t hesitate to save some cash before you go car shopping and applying for a loan. If your credit history is far from perfect or even non-existent, because you just got hired for your first job, having substantial supplemental equity could swing the lender’s decision in your favor.
