If you have bad credit, you're not alone. Around 25% of consumers are considered sub-prime - meaning they have a credit score below 620, usually as a result of not paying bills on time, going through bankruptcy, or repossession.
Getting a car loan with bad credit really depends a lot on the current lending climate as well as factors such as your income, how long you've been at your current job, and how much debt you currently have.
Back in the good ole days before the financial crisis (2005-2007), people with terrible credit were easily getting financed. Shortly after the crises, even people with great credit were having a hard time getting financed.
Thankfully, lenders are more willing to finance these days and if your credit score is above 550, you have a good chance of getting some sort of auto financing.
Be warned however - if you have bad credit, you're way more likely to get ripped off - first by paying a much higher interest rate, and secondly by the car dealer who is trained to take advantage of your situation.
Therefore, it's very important that you exhaust all your options in order to find the best auto financing deal. This can easily save you several thousand dollars over the life of the loan.
Let's take a look at the steps you should follow in order to get a decent car loan with bad credit.
Step 1. Know Your Credit Score and Check for Errors
This may sound boring, but checking your credit score is vitally important. Not knowing your own credit rating is the dumbest mistake you can make when trying to get a car loan - you WILL be taken advantage of.
First, check your credit score for free at FreeCreditScore.com .
If your credit score falls in the 620 to 650 range, you're actually fine. You should be able to find financing from more than one source.
If your credit score is between 550 and 620, you're going to have a more difficult time, but there is definitely hope.
If It's below 550, you're in serious trouble. If you can even find financing, it's going to be at a very high interest rate.
Whatever your score, your next step should be to check your credit report. You can get one free report from each of the 3 leading credit agencies at AnnualCreditReport.com .
Check for errors - specifically any late payments that shouldn't be there. If you find any, take the steps to fix them immediately.
Step 2. Get Quotes from Online Lenders
Now you need to start fishing and see if you can get any lenders to approve you for financing. Online loan aggregators are your best bet, especially ones that specialize in sub-prime loans such as AutoCreditExpress.
Another good one is MoneyAisle.
These aggregators send out your loan application to over 100 lenders, so you have a good chance of getting financing.
Once you complete this step, you'll know within a day whether you got approved by any lenders. Make a note of the best rates you were offered because your next step is to start comparing to other lending sources.
Step 3. Contact Your Local Bank and Credit Unions
If you were able to get approved by one of the online lending sources - that's great. Now you have ammunition and can start comparing with other lending sources without being at a complete disadvantage.
If no online lender approved you, that's okay too. We just need to keep exhausting all the options.
The next step is to call your local bank (hopefully you have a long relationship with them). See if they will offer you car financing. You should also contact Capital One Auto Finance and HSBC. These
two banks are known to offer financing to people with sub-prime credit.
Another great source for car loans are Credit Unions. Even if you're not a member, you can easily join one.
Step 4. Dealer Arranged Financing
Hopefully by now you will have gotten at least one car loan approval. If you did, you'll know the maximum amount you can finance and thus figure out what kind of car you're able to purchase.
With bad credit, you'll most likely be limited to buying a used car. Your choice of vehicle is going to be based on whatever is available in your area within that price point.
You should expand your choice to at least 2 or 3 different vehicles manufactured by different brands. The reason being - some manufacturers will offer sub-prime financing through their captive finance division and it's worth finding out if you can get a loan through them.
The only way to get a car loan through a manufacturer's finance division is to go through a dealer. You will want to contact the different dealers and see if they can beat the loan offers you already got.
Most dealers have relationships with several lenders that work with sub-prime borrowers. Hopefully, you have at least one loan approval that you can compare it to. Otherwise, you're in a somewhat difficult situation.
If a dealer finds financing for you, and you don't have any other rates to compare it to, you're likely going to get fleeced.
Dealers will use this against you and will try to get you to buy a car that you may not even want - a car that they're trying to get rid of because no one else wants it.
They will also try to get you to buy extended warranties and useless add-ons that you don't need - all because they know you're desperate.
Step 5. Regroup and Consider Your Options
If you were approved for financing, but at a very high rate - you need to determine if that is something you can afford and whether it's worth it. If you don't really need a new car, you should pass on it, save money and work on improving your credit.
You also need to realize that a car loan is not set in stone. You can always refinance after a year of making payments on time - at which point you should have a better credit rating and be able to qualify for a lower interest rate.
If you weren't able to get financing through the sources listed above, you may want to look into getting a co-signer. This is someone who is willing to take the risk of paying off the loan in the event that you can't make payments.
Usually, it's a parent or other close relative.
You should only consider this option if you have a stable job and are sure you can make the payments on time.
If you have any doubt about your ability to pay back the loan, your smartest option is to just wait and save up enough money either for a large down payment or to cover the total cost of the vehicle.
One other option is to check out Working Cars for Working Families. a non-profit organization that helps working families acquire vehicles.
My Recommendation for Car Shoppers
TrueCar No-Haggle and Edmunds Price Promise are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan