How to Get Approved for Car Loan With Bad Credit

Bad credit can make it difficult to qualify for personal loans - even auto loan lenders take a close look at your credit history to determine if you are a safe bet for repaying the loan. If you need to buy a new car, getting a car loan with poor credit may be the biggest hurdle you need to overcome. However, there are several strategies you can use to get approved for an auto loan even with bad credit history.

Clean Up Your Credit History

It can be helpful to get a free credit report before you start applying for car loans. If you can clean up your credit score before you apply for a loan, then you stand a much better chance of getting a car loan with a good interest rate. When your credit score improves, lenders will consider your loan application less risky since you have a history of paying off personal loans.

Where Can You Check Your Credit?

You can request one free credit report from Experian, Equifax, and TransUnion a year, or you can make a Credit Karma account to keep an eye on your report throughout the year. Frequently checking your report is a good way to keep track of your progress as you improve your score.

How Do You Clean Up Your Credit?

To clean up your credit score, you can start by paying down consumer debt, such as credit card payments and other past-due payments for personal loans. It may be easiest to start paying off debt to creditors you owe the least, so you can close accounts you don't intend to use. From there, you can focus on reducing larger debts owed to other creditors. On the other hand, you can also start improving your credit by paying off lenders who have higher interest rates.

Improve Your Payment-to-Income Ratio

You can also try to improve your payment-to-income ratio or PTI. This ratio is assessed by potential lenders to see whether you can afford a car loan or not. The main factor of your PTI is your gross monthly income. Most lenders prefer this ratio to be under 20%. If your PTI is good, lenders will feel more confident that you can make your monthly loan payment.

Get a Co-Signer

If you want to get a car loan with bad credit, it may be a good idea to ask someone with good credit to apply for the loan with you. When you have a co-signer on your loan application, this can make a bank or credit union feel more confident that the loan will be paid off.

With this strategy, however, be aware that both you and your co-applicant are on the hook for the auto loan payments, and if there are any defaults on your loan, you will share the same consequences on your credit.

Save for a Larger Down Payment

Not all car loans will require a down payment. In fact, some automakers offer exclusive sign-and-drive deals without putting any money down on the vehicle. However, if you have a bad credit score, you may not qualify for these offers, and many dealerships will require a down payment before you can purchase a vehicle.

How Much Should Your Down Payment Be?

In general, you should aim for your down payment to be at least 20% of the total value of the car. If you can afford to save more before purchasing a car, an even larger down payment can be beneficial. The advantage of a large down payment can be a lower interest rate and lower monthly payments, even for drivers who have poor credit scores.

How Can You Use Your Trade-In Value?

If you're having trouble saving up enough cash for a sizable down payment, then you can use the trade-in value of your current car toward your down payment. Even if you still owe money on your current car loan, some dealerships will still accept the value of your trade-in as part of the down payment for your new loan. The remainder of your previous loan can be rolled into your new loan, which can make it much easier for you to get a loan with bad credit.

Apply to Multiple Lenders

Another thing you can do is shop around to consider multiple loan offers. Sometimes, it's easy to find loans for bad credit, such as from your own bank. However, for many drivers, finding loans for bad credit with a fair interest rate can be a challenge, which means you will need to quote multiple lenders and seriously consider the loan terms to find the best car loan for your financial situation.

Should You Avoid Subprime Lenders?

However, when you are shopping around for car loan lenders, you should avoid subprime lenders. A subprime lender is a creditor that offers auto loans to consumers with bad credit, and while this can make it easier to get an auto loan, the trade-off is usually a higher interest rate that makes it more difficult to pay off the loan over time.

What Lenders Should You Consider?

There are a few different lenders you can consider for your car loan. Some people like to apply for auto loans through a bank or credit union, while others may apply for direct dealership financing. Many people prefer getting loans from credit unions since APR rates are sometimes lower for members. Applying for an auto loan at a financial institution where you are already a member can also speed up the process since the bank will be able to assess the status of your bank account much more quickly.

Other than a traditional financial institution, you may also want to consider online lenders. Many online lenders offer prequalification assessments, which can quote your loan without harming your credit score. Online lenders also typically have lower interest rates, which may be ideal for you. Applying for car loans through online lenders can help you weed out bad offers from other lenders.

What Does It Mean to Get Prequalified?

If you have submitted a prequalification form for a car loan and your prequalification is approved, this doesn't necessarily mean that you are approved for the loan or the estimated loan terms. All the prequalification means is that you meet the creditworthiness required by your lender. However, when your lender reviews your financial documents, you may not be approved for the loan or your prequalified loan terms may change.

Do Bad Credit Auto Loans Have Good Interest Rates?

According to Experian's State of the Automotive Finance Market Report in 2023, if you have less-than-perfect credit, you can expect that the interest rate on your auto loan will be high. For consumers who have good credit, interest rates can be as low as 5.18% to 6.79%.

For consumers with bad credit, on the other hand, the average interest rate for bad credit borrowers can be as high as 14.08% to 21.32%. So, not only does having bad credit impact your ability to get an auto loan, but it also impacts your interest rate and other terms for your auto loan.

What Defines Bad Credit?

A bad credit score is typically defined as any score between 300 and 579, while a fair score is between 580 and 669. Good credit has a FICO score between 670 and 730, a very good score is between 740 and 799, and an exceptional score is between 800 and 850. Some lenders may look at your VantageScore as well, where good or excellent credit ranges from 661 to 850. Most car loan lenders prefer a credit score of 670 or above to finance a new car.

Factors That Cause Poor Credit

A credit bureau will typically assess several factors about your credit history to calculate your credit score. These factors include the payment history on other loans and lines of credit you have, your credit utilization rate, the amount you owe to each lender, the length of your credit history, and your credit mix. Even opening new accounts can influence your credit score.

What If You Filed for Bankruptcy?

Another major flag on your credit history can be bankruptcy, which can remain on your credit report for as long as seven years. Fortunately, some consumers can quickly build good credit even with a bankruptcy on their report with better credit habits. There may even be some auto lenders who offer auto loans to people who are recovering from bankruptcy as a way to build better credit for the future.

Can a Credit Check Impact Your Score?

There are two types of credit checks. A soft inquiry credit check will usually not impact your score at all, but a hard inquiry does. A soft inquiry can occur when you check your own credit report or when lenders make credit offers, but since these inquiries aren't related to a new credit application, they won't reduce your credit score.

Hard inquiries can impact your score because these inquiries are connected to loan applications. On your credit score report, multiple hard inquiries can make you look like a high-risk borrower, and that can make it even more difficult to get a bad credit car loan. For that reason, you will want to be cautious about submitting hard inquiries so you don't reduce your score even more.

Can Dealer Financing Help With Your Auto Loan?

If you need to find a bad credit auto loan, your dealership's financing department may be able to help. For one thing, the dealership can do the heavy lifting of comparing auto loan offers from banks and credit unions, so you can get a car loan even if you have a low credit score. The dealership will usually compare auto loan offers to find the best car loans and loan terms for your budget.

Are There Ways to Lower Your Vehicle Payment?

Whether you are buying a new or used car, your auto finance terms will have a direct impact on your monthly loan payment. In general, your monthly payment will consist of the principal payment for your vehicle, the interest rate on the loan, and other add-on fees that are part of your loan agreement, such as auto insurance or fees for late payments.

You can lower your monthly payment for your bad credit auto loan by adjusting your loan term, such as opting for 48 months instead of 24 months. Doing your best to have a lower interest rate can also reduce your car payment for a new car, even for borrowers with poor credit scores.

Should You Add Protection Plans to Your Vehicle?

Some protection plans can reduce the costs of routine maintenance, such as oil changes. Your automaker may even offer specific protection plans for certain parts of your vehicle, such as tires and wheels. While a protection plan may increase your monthly payment, these plans also significantly lower the cost of vehicle repairs if you ever need replacement parts because of manufacturer defects.

Most drivers can't afford a new car purchase only using cash, which is why most car buyers opt for car loans. Even if you have bad credit, you can get a car loan from a bank, credit union, online lender, or car dealership. To learn more about your financing options, contact Landmark Dodge Chrysler Jeep Ram at 816-836-0100 today.

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