How To Buy A Car With Bad Credit

The time has come where you need to buy a car. There’s only one problem: you have bad credit. The first step is not to beat up on yourself. Sometimes circumstances are beyond your control, one of which might be a low credit score. When it comes to finances, credit history and score can dictate a lot, and having a low score can make buying a new car feel like a hassle. But there’s good news: it is still possible. In this article, we’ll explain exactly how to buy a car with bad credit. 

Why Credit Scores Matter

When you apply for a loan—or even sometimes a new job or apartment—your credit score can be used to judge how likely you are to pay what you owe. Scores generally range from 300 to 800, and the lower your score, the greater risk it is for a lender to grant you a loan. A low credit score doesn’t always exclude you from getting a loan, but it can be more challenging.

Borrowers with higher credit scores usually receive better terms for their loans, such as smaller down payments or lower interest rates. In the last quarter of 2021, the average interest rate for a new car loan was 3.86%. However, interest rates for someone with a credit score between 501-600 can be over 14% for a new car and as high as 21% for a used car. 

Car Buying With Bad Credit

“So, can I buy a car with bad credit?” The answer is yes. Here are some steps you can take to put yourself in a better position to buy a car with bad credit: 

Know Your Scores and Credit Report

Before you begin shopping for a car loan, it is important to check your credit report and scores. It is possible that your credit report could contain errors or incorrect information that is affecting your score. These inaccuracies might hurt your chances of getting the loan you need.

Knowing your credit score can also manage expectations about what you can afford. If you pull your credit score and it is on the lower side, you can expect a higher interest rate. If you have a monthly budget to stick to for your car payment, a higher interest rate lowers the purchase price you can afford.

You are entitled to one free credit report each year from each of the three major credit bureaus, and there are also free financial planning and credit health websites that will help you monitor your credit reports and scores for free. If you are not in a rush to purchase a car, working on your credit score to qualify for a lower rate could save you thousands of dollars.

Save Up a Down Payment

If you’re trying to figure out how to buy a car with bad credit, saving up a down payment can have several benefits. When you finance a car without making a down payment, the lender is taking on more of a risk because they will carry the expense of repossessing the vehicle if you don’t make your loan payments. Because of this, lenders are more likely to finance you if you are willing and able to make a down payment, and some lenders may require it.

Another way a down payment can help is by lowering your interest rate. The more money you can put down, the more favorable your loan-to-value ratio will be. This is information lenders use to consider your interest rate. Because you’ll be borrowing less money and receiving a lower interest rate, paying a down payment will save you more money over time.

Figure Out What You Can Afford

The cost of car ownership goes beyond your monthly loan payment. Gas, maintenance, insurance, and property taxes should all be taken into consideration when you are setting a budget for purchasing a car.

When considering loan terms, it might seem like a good idea to take a longer term—like six or seven years—to lower your monthly payments, but you’ll end up paying more money in interest over time. Plus, you could end up owing more than your car is worth at some point during the loan, which makes it a challenge to sell or trade. Use an online auto loan calculator to play around with different purchase amounts and interest rates to get an idea of what your monthly payment could be.

Shop Around for Different Rates

You don’t have to accept the first loan you are offered. Take some time to shop around and find out the terms various lenders are willing to offer you. Spending a few days making calls and doing research could end up saving you thousands of dollars over the life of your loan. If you are looking into car buying with bad credit, you may have better luck with certain types of lenders.

Your Current Bank or Credit Union

If you already have a relationship with a bank or credit union, you may have an easier time getting financed, even with lower credit. 

Online Lenders

There are many online lenders who specialize in auto loans for people with bad credit. You can get prequalified on their website and use the estimated loan rate and terms to find a vehicle in your budget.

Car Dealerships 

Since car dealerships work with many banks and lenders, they may have relationships with a lender who is able to approve you for a loan. Some dealerships even have special finance departments for customers with credit challenges. 

Buy Here, Pay Here

If you’ve exhausted your options with other lenders, you may have luck with a buy here, pay here dealership. These dealers offer their own financing for customers with bad credit. However, be prepared to pay a much higher interest rate. 

What Comes Next

If you’ve done your research into your credit history, saved a down payment, and you can’t put off buying a car any longer while you work on your credit, choose a vehicle and loan terms you can best afford. Be diligent about paying your loan payments and you may be able to refinance your loan for a better rate in a few years. 

Insure Your New Ride With LOOP

Once you’ve figured out car buying with bad credit, it’s time to call LOOP. We’ll help you insure your car with a policy that meets your budget and exceeds your expectations. Get your free quote today.