Unless you live in a larger city with consistent public transportation services, owning a car is important. You need a car to get to work, appointments and more. Even if you do live in a big city, owning a car allows you to travel on vacation and to see family.
Unfortunately, financing a car with bad credit can be difficult, especially if you’re looking for affordable monthly payments. While getting a car loan with bad credit can be difficult, it’s not impossible. In fact, there are plenty of car loan options available, even for people with bad credit.
This guide provides valuable steps to help you finance a car even with limited or bad credit.
Before you start shopping for a car loan, it’s important to know what your current credit score is. This step can help you determine what car loan options are right for you. Keep in mind that having blemishes on your credit report that result in poor credit doesn’t mean there aren’t still car loan options available. In fact, many lenders may be willing to work with you, especially if you have a steady income.
A free credit assessment can provide your credit score and give you tips for improving it. You can also request free weekly credit reports from the three major credit reporting bureaus—TransUnion, Equifax and Experian—AnnualCreditReport.com.
If your credit score is on the lower end and getting a car isn’t an emergency, you can take steps to improve your credit first. Improving your credit by even just a bit could increase your chances of securing a car loan.
Once you get your credit report, be sure to carefully review all the information and make sure it’s correct. According to one study, around 34 percent of respondents found one or more errors on their credit report. Some of these errors are serious enough to prevent consumers from obtaining the credit they apply for.
If you note any errors or questionable information, you should file a dispute with the credit reporting agency showing the error. If you’re successful at having these errors removed, it can help your credit.
Another step you need to take before you start shopping for a car is to set a budget. It’s critical to know exactly how much you can spend per month on a car payment. You also need to take into account other expenses, such as car insurance, gas and repairs.
Having a set budget right from the start can prevent the temptation of buying a car you can’t afford. When you’re out shopping for a car, an extra $100 or $200 more a month may not seem like too much. However, if your car payment doesn’t fit into your budget, you risk losing your car later due to nonpayment. This mistake can cause even more damage to your credit.
A great way to calculate your loan with your budget is to use an auto loan calculator. By filling in your credit score, the loan amount you need and what state you live in, you can find averages of just how much you could be paying a month.
Most car lenders require some form of a down payment. While most lenders have a minimum down payment requirement, offering a higher amount may improve your chances of getting a loan.
The higher down payment you can offer, the less money you’ll have to borrow. It also reduces the risk of potential loss for lenders, which could make them more willing to work with you. Additionally, a higher down payment may get you lower interest rates.
It’s best to start saving now so you’ll have extra money saved for a down payment when the time comes.
Once you’ve completed the first three steps, you’re ready to start shopping for car loans. There are several options you can try, including:
While shopping around, it’s important not to jump at the first offer you get. Instead, take the time to compare your loan options to ensure you choose the right one for you.
Consider other terms of the loan in addition to interest rates. For instance, the length of the loan is an important factor. While longer loans can result in lower monthly payments, this also extends how long it will take to pay off your loan.
Also, consider any added fees, such as warranty cost, gap insurance and prepayment penalties. These additional fees may impact how much you have to pay each month.
If you’re struggling to obtain a car loan due to bad credit, you can consider using a cosigner. If you have a friend or family member who is financially stable and has a good credit history, they may be willing to cosign for you.
Before you take this step, it’s important to understand the benefits and risks for both you and the cosigner. For example, if you fail to make your monthly payments on time, you risk losing your car and putting a negative mark on your cosigner’s credit. In fact, your cosigner will be responsible for making these payments if you fail to do so. This makes it even more important to buy a car that’s within your budget.
If you get an auto loan with higher interest rates than you want, you can always consider refinancing your auto loan later. After a year or so of making on-time payments and taking steps to repair your credit, your credit health may improve. If it does, you may be able to refinance your current auto loan to one with lower interest rates and payments.
If you’re considering buying a car, now is the time to take control of your credit. Work with the team at Lexington Law to get more help improving your credit.