Is It Possible to Secure a Car Loan with a Low Credit Score?

Is It Possible to Finance a Car Loan with Bad Credit or No Credit

Car is not a luxury but more like a necessity, as we fulfill our most needs like going to work or school. However, economic challenges and our inability to maintain a decent credit score may make it more challenging to purchase a car. It is a common perception that securing a car loan with low credit might not be possible, but that's not true because getting a car loan with bad credit is still within reach.

Key Highlights

  • You can secure car loans even with bad credit from banks, credit union online lenders, and dealerships.

  • Saving for a down payment is a strategic move to lower your interest on a car loan and secure a loan with bad credit.

  • The average credit score required to buy a new car is 717, and for a used car, it is 656.

Can I Finance a Car Loan with Bad Credit?

Securing a car loan with bad or no credit is possible but requires more effort. Many lenders help those individuals facing challenges with their credit scores. However, they impose high interest rates and fees. In such a situation, a "second chance" car loan, also called a subprime auto loan, can be a good option. These specialized lenders focus on individuals with meager credit scores and a history of bankruptcy or previous repossessions. 

Many established banks offer second-chance loans, but it is important to note that they come with elevated interest rates. This provides an alternative option for those who want to secure a car loan but have low or bad credit scores.

                                                                      

How Do You Get a Car Loan with Bad Credit?

1- Check Your Credit Score

While exploring your financial options, it is crucial to understand your credit score. You can get your credit score from the FICO credit scoring system, which ranges from 300 to 850. If your score is below 580, then it is categorized as poor.

FICO takes specific steps to calculate your score, such as the outstanding debt, duration of your credit history, and payment track record. If you have late payments, consistently exceed your available monthly credit, and have a brief credit age history, it can negatively impact your credit score. Therefore, it is vital to be aware of your credit score and the factors that negatively and positively influence it.

2- Save for a Down Payment

Purchasing a car can be a long-term financial goal for many; therefore, setting aside funds for a down payment is essential if you have a lower credit score. This strategy enhances your chances of securing approval for an auto loan. 

Making a down payment will help mitigate the impact of higher interest rates and reduce your loan-to-value ratio. This significantly positions you to qualify for more favorable loan terms. A down payment is always a good option, but some lenders may be willing to consider a down payment as low as $1000. This may be modest but can make your auto loan payments more manageable and decrease your overall borrowing cost.

3- Research Thoroughly

Preparing in advance before opting for a loan may help you negotiate smoothly. Before applying for a loan, you clearly understand the monthly payment within your budget and the expected annual percentage rate based on your credit score.

Individuals with poor to bad credit scores often fall into the subprime category, ranging from 501 to 600. With such credit scores, they get average rates of 11.86% for new cars and 18.39% for used cars. It may help them negotiate and make informed decisions if they become aware of this figure.

4- Explore Multiple Lenders

Avoid restricting yourself to a single lender; many options can help you secure the best possible rate.

  • Banks and Credit Unions: These are institutions where you can have existing relationships. Some banks and credit unions may offer their members a discounted rate, especially if they have a good banking history.

  • Online Lenders: Online lenders provide a pre-qualification option that allows you to assess the terms for which you may be eligible. Some online lenders may also take additional considerations like your employment history or education during the application process.

  • Car Dealership: It is a good option for those individuals who face challenges securing a loan from other lenders. However, dealerships may provide loans at higher rates to increase their profits, but their qualification process is relatively more accessible than other lenders. 

  • Buy Here Pay Here Dealership: If you face problems obtaining approval from traditional lenders, this dealership can be an excellent option. They have a more lenient process in approving auto loans for customers with bad credit, but they come with higher interest rates than others.

5- Avoid Subprime Lenders

Subprime lenders can be a good option for securing a car loan with bad credit. They specialize in serving customers with lower credit scores and may even simplify the car buying process. Still, subprime car loans often come with higher interest rates than other options.

Opting for a subprime loan could result in paying even more in additional interest over the life of the loan. It is a financially less beneficial choice in the long run; therefore, exploring other alternative lenders and options is advisable to minimize the overall cost of your car loan.

6- Go for a Shorter Duration Than Monthly Payments

While seeking a car loan, focus on loan terms rather than lower monthly payments. Lower monthly payments can be appealing, especially on paper, but they come with longer terms. Suppose you opt for extended terms, notably higher APRs, on bad credit card loans. In that case, it can result in paying more for a car over the life of the loan due to higher interest rates.

Prioritise terms that offer more favorable options and charge lower APRs over the shortest period. This strategy will help you manage your monthly payments with a reasonable interest rate.

7- Consider a Co-Signer

You can go for a co-signer for your car loan, especially if you have a less-than-ideal credit history. You can approach your friends or family members with a stable income, a robust credit score, and an excellent credit history.

A co-signer will reduce the lender's risk as they become responsible for your loan if you encounter difficulty making payments. This will also help you negotiate and land a lower interest rate. It is also important to note that failing to make any payment can adversely affect your co-signer's credit score, even though they don't own the vehicle.

8- Go for Pre-Qualification

This might not be a good option for many, but it can be a strategic approach that provides insights on whether you are eligible for the loan. It will also help estimate the terms, saving time and preventing unnecessary temporary dips in your credit score. 

If you pre-qualify with multiple lenders, you can compare the rates to identify the most favorable option. However, it is also important to note that pre-approval involves a hard credit check. It may lower your credit score, but keep your loan application within a limit of 14 days to mitigate the impact on your credit score. Pre-qualification will help the lender understand your commitment and ultimately help you extend an auto loan.

Suggested Articles: Refinancing a Car Loan How Does It Work? What Are the Benefits?

What Minimum Credit Score Do You Need to Get a Car Loan?

Credit requirements for securing a car loan vary by lender. And no industrial standards determine which credit score a lender can approve a loan. They make their policies and use various factors beyond credit scores and reports to assess the buyer's creditworthiness. 

However, credit history is a significant factor that lenders delve into before granting a loan. This includes evaluating your income, existing debt commitment, and your record of promptly paying past loans. 

 An auto loan involves using an auto-specific credit score like the FICO auto score, which operates differently than a general credit score. It ranges from 250 to 900, where a higher credit score means lower risk for the lender.

It is possible to secure a credit loan with a bad credit score ranging between 300 and 579, but it may be more challenging and expensive.

Final Words

Financing a car loan with bad credit can be challenging and lead to less favorable terms. However, it is still possible to book a car loan despite having bad credit. By thoroughly conducting research, accumulating funds for down payments, seeking pre-approval from lenders, making timely payments, and considering refinancing can help you secure a car loan with bad credit.

Cars typically depreciate and start losing value when you buy them. Therefore, it is imperative to consider the long-term implications of your loan, especially if you think to sell the car before the loan is fully repaid. In such a situation, you still have to repay your loan. Before purchasing a car, make informed and responsible financial decisions and ensure that the vehicle you choose is suitable for your needs and within your budget limit.

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08 Dec, 2023

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