Unless you live in a large urban area with a well-constructed public transit system, a car is a necessity. As you well know, cars are a huge expense. Unless you happen to be laying on a pile of cash, you likely require a loan to purchase a vehicle. If you happen to have bad credit, you are going to find that trying to get a car loan at all will be difficult.
However, there are options even for those that have damaged their credit. In fact, if some of these options are used responsibly, they could even raise your credit score for future loans!
- Buy-Here-Pay-Here Dealerships
- Second-Chance Financing
- Loan Co-Signing
- Credit Unions
These kinds of dealerships do not outsource their financing to third party lenders, nor do they require that you get your financing from a bank. Instead, they act as the lender themselves, effectually becoming the entity that both sells and finances the car for you.
Since they stand to financially benefit from you being able to finance a car, you will find that their financing terms are more flexible, allowing for borrowers with poor credit. They get to set their own terms, after all. However, even though it may be easier to get financing through this kind of dealership, they generally will charge a much higher interest rate than a traditional lender or bank.
"Second-Chance" is just another way to say "bad credit." Many auto dealerships have partnerships with second-chance lenders that allow customers with bad credit to potentially be able to get a car loan. Unlike like buy-here-pay-here dealerships, this kind of financing is through a third-party lender or bank.
The purpose of these loans is exactly as the name implies. They give customers a "second chance" to be able to get a loan and purchase a vehicle. To do this, these lenders take a few extra steps than traditional lenders.
First, like buy-here-pay-here, you are likely to see a higher interest rate because of the increased risk for the lender. Then, the lender will likely look at other factors to consider your creditworthiness. This includes factors like your income, where you live, whether or not you have a job, and others. If you are in a situation where your finances are solid and you are gainfully employed but are simply in the process of repairing credit, these types of loans are ideal.
This is what many first-time car buyers will do in order to purchase a vehicle under their own name. A co-signer on a loan is someone who has established credit that states they will assume financial responsibility for the loan should you stop making payments on it. A common scenario for this kind of loan is a teenager getting a loan with their parents as co-signers. This is a great way to not only qualify for a loan but to also get a loan with a good interest rate, depending on the credit of who is co-signing for you.
This method, of course, has obvious risks, specifically to the co-signer, and unless they already trust you, it may be difficult to find someone willing to co-sign a loan with you. However, if you do have someone in mind, this method is ideal.
This is a method you can use even if you are not a current member of a credit union. These institutions can offer financing at lower interest rates in general and have more flexibility to work with borrowers with bad credit. It will not be as easy to get a loan from a credit union as co-signing or by going through a buy-here-pay-here lender, but if you qualify, you will likely find decent interest rates.
If you are trying to use these methods and you are still having trouble securing a loan, there are a few more steps you can take to make it easier to secure financing for a vehicle.
- Check your credit score and resolve disputes.
- Have a down payment ready
- Shop lenders and compare options
Even if you know your credit is poor, you should always check and review your credit score. It is possible there are items on your credit report that are incorrect, making your score lower than it needs to be. It also lets you see if someone has open accounts in your name without your consent.
If you see an item on a credit report that is in error, you can dispute them directly with the credit bureau that is reporting it online. Once disputes are settled, you are likely to see an increase in your credit score, making it easier to secure financing.
Checking your credit score also will let you be able to organize outstanding debts that you are responsible for and create a budget to start paying them down. Once outstanding debts are settled, the lender will report it to the credit bureaus and it will also increase your score.
Having a sizeable down payment will make it much easier to secure financing, regardless of where you are looking to purchase a vehicle. A large down-payment means less you need to borrow, making it easier to secure financing. It is also generally easier to get a better interest rate on a smaller loan, as the risk to the lender is reduced.
If one lender tells you no, do not get discouraged! That does not mean all of them will turn you down. Shopping lenders is something you have to be prepared for if you have bad credit, especially if you are looking to get the best rate possible. You can talk to local lenders, the dealership, and even look to online lenders, which frequently have more flexibility in who they lend to and what rates they offer.
If you follow these steps, even if you have bad credit, you should be able to secure financing for a car! If you have further questions about financing, where to find a particular dealer or lender, search online or reach out to a local dealer for details.
