by Susan Paige
Three things are certain in the life of the average person in the United States: death, taxes and, well, buying a car. With over 272 million vehicles on America’s roads, it’s easy to see why a car is a must-have.
Unfortunately, cars are getting more expensive year over year. To afford a new one, or even a used one, you need to get an auto loan. This means you need good credit.
But what if your credit is in the red zone?
Continue reading to learn how to buy a car with bad credit.
Is It Possible to Buy a Car with Bad Credit?
If you’re wondering whether you can buy a car with bad credit, you’ve probably been in a situation where your bad credit stood in the way of getting approved for a loan.
You see, lenders rely on a borrower’s credit history to measure their creditworthiness. If you’ve got good credit, it means you’re a financially responsible person. You likely haven’t defaulted on any loans and you pay your bills on time.
Bad credit, though, is a sign of financial irresponsibility. Perhaps you have defaulted on a couple of loans or skipped credit card payments.
When lenders see that you have a bad credit score, they have two options: reject your loan application outright, or approve it and charge you a higher interest rate.
Here is the thing, though. Bad credit doesn’t necessarily mean you can’t afford to take out a loan and service it without fail. Your bad credit could be a result of a past financial mistake, which you have since overcome and learned from.
So, yes, it’s possible to buy a car loan with bad credit. However, you need to know how to go about it.
Determine Whether You Really Need the Car Right Away
Just because you can buy a car with bad credit doesn’t mean you should go for it right away. With bad credit, you’ll only pay more in interest.
This is why it’s essential to evaluate your need for a car. If it’s not a pressing need, perhaps you can hold off on the idea for a handful of months or even a year.
Use this period to build your credit.
Get a copy of your credit report and comb through it. If you find a mistake, ask the issuing credit bureau to fix it. Pay off loans in default, clear your bills on time, and maintain a low credit utilization ratio.
Gradually, your bad credit will improve. With good credit, you’ll easily get an auto loan without worrying about paying exorbitant rates.
That being said, what if you need a car urgently? Follow these steps.
Establish Your Budget
Assuming you didn’t need a car loan, how much money would you spend on purchasing the car?
This largely depends on your income. How much can you afford to take away from your monthly paycheck without straining other aspects of your life? Bear in mind that the average car payment for a new car is $550.
When establishing your budget, consider the fact that your credit is bad. Not many lenders are going to give your application a nod if you’re buying an overly expensive car.
Go for a budget car. The lower the value of the car you’re asking a lender to provide, the more likely they’re to approve your auto loan.
What if you go for a used car? Sure, used cars are cheaper, but it’s harder to get lender financing when buying a used car.
Shop Around for the Best Lender
When you want an auto loan, your local bank or credit union is usually your first stop. However, traditional lenders aren’t known to make loans to people with bad credit.
Luckily for you, there are several alternative lenders that offer bad credit car loans. These lenders don’t care much about your credit. As long as you can prove that you have the ability to repay the loan — typically via pay stubs if you’re formally employed or bank statements if you’re self-employed — you’ll get it.
A mistake most bad credit car loan borrowers make is failing to shop around for the best alternative lender.
We get it. With bad credit, you probably thought nobody would look at your application twice. Don’t let the excitement of finding a bad credit loan lender prevent you from finding the best deal on your car loan.
As such, be sure to look around and compare loan rates and terms. Make use of online comparison sites and zero down on a lender with a rate and terms that suit your finances.
Offer to Pay a Deposit
Most traditional lenders will finance up to 100 percent of a car’s value, but this is when you have stellar credit and a solid income. But when you’ve got bad credit, getting 100 percent financing becomes harder — let alone getting approved.
However, offering to pay a deposit (usually 20 percent of the car’s value), can go a long way. Paying up a deposit not only reduces the amount of money the lender has to give you but also demonstrates your commitment.
Get a Cosigner
A cosigner is someone who applies for a loan with you and legally agrees to pay off the loan in the event that you’re unable to. When you have a bad credit score and your income is shaky, a cosigner could be all you need to secure a bad credit car loan.
Your cosigner could be anyone who’s willing to vouch for you and ready to bear the consequences in case you default. This could be your parent, a sibling, or friend – as long as they have good credit and proof of income.
You Can Buy a Car with Bad Credit
In modern times, a car is a necessity. It makes your commute easier and offers unapparelled convenience.
However, cars don’t come cheap. Most people need a bank loan to afford one, and a bank loan needs you to have good credit. But if you’ve got bad credit, don’t lose hope. With this guide, you now know how to buy a car with bad credit.
See you on the road soon and keep reading our blog for more money tips and advice.