When you fall into a bad credit situation, getting a car loan isn’t impossible. However, it usually means that you’ll need to shell-off more money in repayment of a higher cost car loan.
To avoid such a problem, here are some steps and financial advice that you can follow so you can improve your credit before finally getting your dream car.
Need a Car But Can’t Afford to Pay Cash?
Don’t worry because you’re not alone. A 2016 statistics from the Federal Highway Administration has revealed that there are over 264 million commercial and private vehicles that are registered in the United States.
Just last year in a study by Experian, they found out that most of these vehicles were purchased through financing.
Acquiring a car is a major decision one has to take, and in America, it is essential for every family to have one. In the first quarter of 2018 alone, the average auto loan rate was found to be at $31,455.
And if you opt for something cheaper, used car loans were at $19,536 (still expensive).
Experian further reported that majority of these auto loans were from people who had “super prime” and “prime” credit scores for both used and new vehicles.
It’s a fact that not everyone can loan a five-figure sum of money for a car and if your credit score is terrible, getting approved for a car loan can become more challenging.
However, finding a car loan when you have a bad credit score isn’t impossible. It’s just that because you’re a risky borrower especially in the lender’s eyes, interest rates may be higher!
Below are things that you need to pay close attention to when you’re planning to get an auto loan on a bad credit score.
Preparation is Important
There won’t be much time for you to work on improving your credit loan especially if you urgently need a car loan but what you can do is to plan ahead of time.
It’s possible to make some steps that can help you prepare for the auto loan and improve your overall borrowing experience.
Work On and Build Up Your Credit
One of the primary things that you need to be working on is to understand your credit score/standing. Yes! It’s essential to do this before you go shopping for an auto loan. Take some time to go through your credit report and check items that are negative. This includes accounts that are delinquent and if you find anything that’s incorrect, report and dispute it. Reviewing your credit reports is free on Credit Karma for both TransUnion® or Equifax®. Doing this gives you a first look of what your auto loan lender would see at the time they review your loan application.
Below are other steps that you can take to take your credit score to a better standing:
- Be sure to pay all your bills on time and in full every month
- Avoid getting multiple credits in a short period
- Pay down any existing debt
Just remember that people with good credit get a lower interest rate and that can translate into significant savings when split into monthly payments. Experian’s first quarter analysis for 2018 has shown that those who have “super prime” credit scores can save an average of up to $43 every month on auto loan compared to those who are on the lower credit scores.
Start Saving for Downpayment
According to the vice president of Ally Financial’s consumer credit operations Mr. Mike Kane, it’s a good idea to save for a significant amount that you can use as a downpayment. It’s also essential to pay every bill on time and take any outstanding debt to a minimum whenever possible.
Get Yourself Preapproved
It is also possible to shop for a car loan online and submit an application to get yourself pre-approved. The process would let the lender of your choice to review your credit reports and see what your current credit score is, your income bracket and any other expenses that you have which will help them know what amount they can let you borrow and the interest rates that they can give you. Before you apply for a preapproval, be sure to go to online and check the price on auto loans offered by lenders, your specific bank or if you’re a member of a local credit union, check their website for their auto loan rates.
If you have an existing relationship with a bank, it would be a good idea to check with them first. You can leverage that relationship to get cheaper interest rates and better auto loan amounts.
You can minimize the impact that getting an auto loan can have on your credit score by shopping rates that are in the same repayment period. If you check with the FICO® scoring models, you need to take note that they consider multiple credit inquiries that are of the same type as one single inquiry within a 45-day period. VantageScore, on the other hand, considers multiple inquiries as a single one within a period of 14 days. These are important things to remember when you’re shopping for an auto loan to apply for.
You can also compare loan terms and as well as their interest rates so you can see in advance how much money you’ll have to pay the lender back over the life of your auto loan.
For instance, choosing an auto loan with a 60-month term and 8.14% APR would cost you higher than one that is of the same term with only 4.89% APR. A bad credit score won’t get you pre-approved for a car loan by a financial institution, but you can get one from a car dealership.
However, chances are you’ll be charged higher interest rates compared to loans offered by lending institutions. People with bad credit scores get charged higher interest rates because they are viewed upon as risky borrowers by these institutions. That is the reason why it’s important to shop around before heading to a car dealership.
Is it Advisable to Use a Personal Loan To Buy a Car?
Most financial experts don’t recommend borrowers to use a personal loan to get a car. They even advise that you put it as the last option on your list if you plan to purchase a vehicle. It’s tough to get approved a large amount of loan that one might need for a car, and personal loans typically have interest rates that are higher than those of car loans.
Personal loans are not secured and do not require any collateral which is why getting approved for such kind of loan is more difficult. Auto loans are designed for the purchase of a truck or a car making the application and borrowing process a lot easier. Auto loans require a downpayment which is not the case for personal loans. The vehicle you’re going to purchase serves as the collateral for the loan.
Is It Possible To Get Better Rates? How?
Ending up with an auto loan that charges a higher interest rate is possible, but it shouldn’t be a permanent thing. You can leverage it to improve your overall credit score just by making payments on time, and they should be full payments every time! You need to make sure that you’re only using a portion of the available credit that you have so that refinancing your loan to get a better interest rate would become possible.
A car loan generally offers lower interest rates compared to personal loans. If you target to refinance it to get lower interest rates, you’ll get better results with a car loan in this case. If you want to refinance the be sure to give the same diligence in paying it on time and in full just as what you did when you first purchased your car.
You can start by shopping around and comparing terms and rates offered by different lenders both online and even from “bricks-and-mortar” banks so to speak. You can also check with your local credit union or check with your previous lender to see if they can offer to refinance your loan on a lower interest rate.
Once you zeroed-in the lender you’re going to refinance with, the lender will do recheck your credit, identify your current income and see how worthy you are and whether or not your credit situation has improved. They’ll see essential points such as a new work that pays more or getting a raise or promotion which raised your salary. These points would then offer you the chance of getting a better term and even better interest rates.
Getting approved for a car loan when you have bad credit is going to be a challenge. If you get accepted for one, chances are you’re going to be charged higher interest rates which means that you’ll be spending more in repayments during the lifespan of your loan.
However, you can take steps in improving your credit score before going to shop for such a loan, and it will lessen the financial blow. Also, it’s essential to save as much money as you can for a downpayment or get a reliable but cheaper car which can meet your needs so you would end up borrowing less from the lender.
If you’re currently working on very hard to get your credit back to good standing, be sure to take the least amount of debt so you can be sure that you can afford to repay it and keep your credit score in good health.