Financing a Car with Bad Credit: Five Keys to Success
1. Obtain Your Credit Score
Your credit score is the first thing lenders consider when determining your credit status and the interest rate you qualify for. Before shopping for an auto loan, check your credit score using legitimate online sources like Experian’s Free Credit Score or credit card companies that provide free scores to cardholders.
Borrowers with bad credit scores, such as Subprime and Deep Subprime borrowers, often face difficulty in securing car financing. However, there are still options available. In the third quarter of 2023, loans to higher-risk borrowers decreased, but they still accounted for about 14% of all new and used car loans.
2. Obtain Your Credit Report
In addition to your credit score, it is essential to obtain your credit report, which provides your credit history, including previous and active loans, and whether you pay on time. The three major credit information agencies, Experian, TransUnion, and Equifax, collect this information from lenders and supply it upon request. You have the right to one free report per year from each agency, which can help you identify and address any negative information that may be affecting your credit.
3. Raise Your Credit Score and Report
If you find any errors on your credit report, it is crucial to dispute them with the reporting agency. Each agency has its own procedure for resolving disputes, and they don’t communicate with each other. Additionally, take the time to clean up any legitimate negative marks on your report. Pay off balances in collection and make all accounts current. Paying your creditors on time is the best way to improve your credit score.
4. The Importance of a Down Payment
While it may be challenging to gather a substantial down payment, having “skin” in the deal increases your chances of securing a loan. Lenders view a higher down payment as a sign of reduced risk and may be more willing to approve your loan or offer a lower interest rate. Aim for at least 20% down, although this may vary depending on your credit history. If your credit is weak, putting down more can strengthen your chances.
5. Where to Get a Car Loan
Before heading to a dealer, approach various lenders to get preapproved for a loan. Finance companies are often more receptive to subprime borrowers, but don’t discount banks and credit unions, as they are becoming more open to working with borrowers with less-than-perfect credit. Car maker-owned finance companies, like GM Financial, also offer financing options for those with weaker credit. If necessary, consider a “buy here, pay here” (BHPH) dealer as a last resort, but be prepared for higher interest rates. Shop around for BHPH options that report to credit bureaus to establish positive payment history.
By following these five keys to success, you can increase your chances of financing a car with bad credit. Remember to research and plan ahead to find the best loan terms and interest rates that fit your financial situation.
Analyst comment
Positive news. The article provides helpful tips and options for individuals with bad credit looking to finance a car. Following these steps can increase their chances of securing a loan with favorable terms and interest rates. With more lenders becoming open to working with subprime borrowers, there are still options available in the market.
