Many lenders provide auto loans for those with poor credit. By taking steps to improve your score before applying, qualifying and receiving favorable rates should become much simpler. Saving up for a down payment and financing over shorter terms may also be helpful in getting approval.
Finding auto financing with poor credit can be frustrating and expensive, but that doesn’t have to mean high-interest rates or unexpected fees.
Know Your Credit Score
Before beginning your car search, it’s crucial that you understand your credit score. Knowing this number will allow you to narrow down lender options and budget accordingly for a vehicle purchase. Achieved approval with favorable loan terms equates to having an ideal credit score; FICO usually refers to this benchmark at 670 or above; however lenders can create their own scoring models specifically tailored for auto loans.
Lower credit scores limit your lender options and make qualifying for auto loans more challenging, often necessitating co-signers and large down payments in order to secure financing. Furthermore, loans with poor credit may come with heftier interest rates due to lenders viewing you as risky.
Borrowers must consider many factors when applying for auto loans, including total debt and income levels, to determine their eligibility. Therefore, to increase your approval odds and secure more desirable rates and terms when applying for one it would be wise to try raising your credit score before beginning this process.
Factors to consider for approval include payment history, employment history and your debt-to-income ratio (the total monthly debt payments compared to gross monthly income). A stable financial profile that includes minimal debt can improve approval odds while simultaneously locking down lower interest rates.
Submitting additional debt can harm your credit score by decreasing available credit and shortening average account age, so it’s wise to hold off opening new credit cards or loans before shopping for auto loans. Avoiding new debt is an effective strategy for any borrower looking to improve their score, but especially those looking to rebuild it.
Additionally, keep in mind that there are no federal regulations capping auto loan interest rates, meaning your interest payments could be substantially higher than they would be for someone with good credit and stable income. Ask your lender about any document fees they might charge; these extra expenses could quickly add up and significantly cut into your overall financing savings.
Shop Around
Car shopping with poor credit can be stressful, but conducting your research can help you find a lender willing to work with you. Online lenders and lending platforms may provide the best rates, while pre-qualification letters from banks may speed up the process and give an indication of financing options and rates available to you.
Lenders look for signs that you can afford the monthly car payments alongside your other debt obligations such as loans and credit cards when making their decision to approve you for an auto loan. Along with your credit score, employment duration and income receipt are factors which could bolster your chances of approval.
Before making an application, try strengthening your credit by repaying other debt or saving extra money – this may move the needle in favor of you and increase the odds of approval while getting you closer to getting the lowest auto loan rate possible.
Your options for an auto loan depend heavily on a lender’s minimum credit score requirements and interest rates can differ widely depending on which lenders offer them. Alliant Credit Union requires at least an FICO credit score of at least 620 while Navy Federal and Consumers Credit Union may have lower requirements. You could also try qualifying for personal loans to finance your purchase, though those typically come with higher rates than auto loans.
MyAutoLoan and other online and mobile lenders specialize in offering auto loans to people with poor credit. Their minimum credit score requirement may be 600 and can provide offers from multiple lenders within one application. Other lenders, like Navy Federal and Consumers Credit Union offer car loans to applicants with at least 680 FICO scores – some dealerships even provide dealer-arranged financing that may help get you approved with better rates than when going it alone.
Look for a Co-Signer
Co-signing an auto loan helps reduce lender risk if you become unable to repay it yourself. Finding someone with solid credit who will take on liability in case payments are missed is essential, while having steady income to show they can afford this loan is also key. When considering this option, be upfront with any friends or family members involved so they understand all responsibilities and costs involved in co-signing with you.
When applying with a cosigner, your lender will check both of your credit reports. They’ll evaluate how much debt you owe and its types, along with payment history. Furthermore, they may need to verify both of your identities using government issued ID or passport documents.
Lenders will also take into account your cosigner’s income, credit score and financial stability when making their decision to lend you money. They look for high credit scores with low debt loads and consistent income streams as key criteria in lending decision-making processes. Lenders may run background checks to ensure no criminal records, civil judgments or liens exist against your cosigner.
Your cosigner and you will both sign on the auto loan jointly, so your names will appear as joint owners from day one. Your incomes may be combined for loan approval purposes and each of you will share equal responsibility for its repayment. It is important that both of you understand each other’s responsibilities before finalizing the agreement and signing.
If your relationship is longstanding with your cosigner, you may be able to negotiate exactly which roles and responsibilities will fall to each of you in an agreement. Although this practice is rare, it could help avoid unexpected complications down the line. Be wary of falling behind with payments: missed payments could negatively impact both of your credit scores while straining relationships further.
Carefully examine all terms of financing offered at a dealership, including sales price, interest rate, fees and charges. Compare them against those offered by other lenders through our in-depth auto lender reviews; additionally use a car calculator to estimate monthly payments and how much it will cost over time to finance your purchase.
Avoid Buy-Here-Pay-Here Lots
Many people with bad credit believe their only option for buying a car is from a “buy here pay here lot”, which acts as its own bank and doesn’t conduct credit checks before charging exorbitant interest rates that can spiral into more debt. Unfortunately, these dealerships tend to get an unfavorable reputation; but even with poor credit it may still be possible to qualify for financing at a traditional dealership that provides more favorable terms.
When purchasing from a buy here pay here dealership, be sure that your payments are reported to the credit reporting agencies. Otherwise, your efforts won’t help rebuild or repair your credit and they may require you to sign a contract that states they can repossess or disable the vehicle with tracking devices if payments are missed.
Buy here pay here dealers often require a substantial down payment – sometimes up to 50% of the vehicle’s value – in order to protect their investment if payments fall behind. They also may require you to make payments every week or two weeks instead of monthly, which may prove inconvenient if you are used to managing auto loans on this schedule.
If you have bad credit and you’re having difficulty affording an auto loan, a personal loan could be your solution. While interest rates tend to be higher, qualifications are usually more lenient and you could even borrow the amount necessary with an auto co-signer who has good credit as this could provide transportation without risking your credit score too much. Don’t give up! With responsible financial decisions you could see improvements quickly which could open the doors to further financing opportunities in the future.
