You dream of the open road. Four wheels beneath you, taking you from point A to point B. Unfortunately, you’ve got a bad credit score and a car loan seems as likely as striking gold.
The bad news: you may have a long road ahead of you. The good? There are bad credit auto loans for those with the lowest of low credit scores. And the best part? You won’t be making this drive alone.
Can You Buy a Vehicle With Bad Credit?
Your credit history is often painted as the end-all and be-all when it comes to major purchases like houses or automobiles. Sure, a solid credit score can land you a better interest rate, lower down payment, and lower monthly payment. Still, those with no credit or even a low credit score can take various routes toward car buying.
A low credit score can simply disqualify you from certain types of loans, or translate to a higher interest rate. It’s also important to keep in mind that no two financial institutions or lenders will have the same definition of “good” or “bad” credit, so be prepared to shop around to find the best financing options for bad credit auto loans.
10 Steps to Buying a Car With Poor Credit
The road to car ownership is a lot like a road trip, complete with twists and turns and numerous possible detours. No matter what your credit report says, there’s likely a road that will lead you to car ownership. These steps may not apply to everyone, but follow them and you will go into car buying better-equipped.
1. Determine If You Need a Car
Before you pursue car financing or wind up with a junker from the local lot, ask yourself if now is the right time for a car. The temptation of a car is very real, but if you live in the right area you may not even need one.
For example, if you live in a populated city there are likely local transit options available. If so, look into how expensive a pass is and compare that to the typical new car payment of $530 per month. If you primarily need a car for getting to work, see if there’s anyone you can carpool with. Even if it’s not ideal, if there’s a way you can hold off getting a car for several months you should strongly consider it. This stretch of time can be used to build up your credit with a co-signed loan or secured credit card. You can land an even better loan rate if you build up your credit.
2. Shop Around for the Right Lender
A common mistake of many car buyers is going to a dealership and buying the first car they like. Car salesmen are notoriously aggressive, so start your hunt online before you set foot in a car dealership.
Most auto dealers have thorough websites that let you view the new and used vehicles on their lot. This will at least give you an idea of the cost you’re looking at. In some cases you can get pre-approved, but don’t punch your info into anyone’s system too soon. (They’ll call you until the end of time.)
Once you’ve found a few cars you like, it’s a good idea to talk to financial institutions about loans instead of the dealership. Many dealerships will offer subprime auto loans, but these can have aggressively high interest rates that can cost you thousands over the lifetime of the loan.
A credit union or reputable bank is more likely to be fair with you and discuss all of your options. For example, maybe you can get a better interest rate on a smaller loan and simply need to save up enough for a nice down payment, rather than take a larger loan offered at a dealership with higher interest rates.
3. Check Average Interest Rates
So, you’ve found a car you might like and you’ve spoken with some financial institutions. Now, it’s time to check the average auto loan interest. If you have a poor credit score, you’ll likely have a higher interest rate than those with a prime credit score. This is to be expected. Still, take note of what the averages are for various credit ranges and bring this with you when discussing any loan terms.
If the finance department is offering you a loan with an interest rate close to what you wrote down, great. If it’s more than double what it should be, that’s a huge red flag.
4. Consider Getting Pre-Approval
Pre-approval is the process of going to a credit union or other financial institution and having your credit rating, history, and finances analyzed. The bank will then give you a pre-approved loan that tells you how much you qualify for and what your interest rate will be.
With this loan approval in hand you can have clear boundaries for yourself when shopping around on the lot. For example, if you’re approved for $15,000, then you know that $20,000 car is simply out of the question.
Pre-approved loans can also be used as a bargaining chip at a dealership. If you’re pre-approved for a certain amount through your financial institution of choice, the car dealership could feel more pressure to get you a better deal through their own lender.
5. Shop Around for No More Than Two Weeks
Your credit score can actually take a hit when a hard inquiry is made on your credit history. What’s a hard inquiry? All those financial institutions and dealerships checking your score.
Fortunately, your credit score generally won’t be impacted by any hard inquiries after the first one if made within a two-week window. To prepare for this, scope out as many lenders as possible and then have your inquiries done within that window to avoid hurting your score more than necessary.
6. Make the Biggest Down Payment Possible
Bad credit auto loans can help your credit score over time. Interest? That does you no favors. Keep your interest as low as possible by making the biggest down payment you can. To facilitate this, try to plan ahead before shopping for a car and save up as much as you can.
Remember: The bigger your down payment, the more likely you are to get a lower interest rate. This can save you thousands over the course of the loan.
7. Try to Get a Co-Signer
A co-signer is someone who signs on the loan with you, taking responsibility for the loan in the event you default and can’t pay. Because the co-signer is taking on a risk by helping you, it’s best to find someone close to you who trusts and knows you. This person is generally a family member, but can even be a close friend. A co-signer with a great credit score can help you secure a loan with a much lower interest rate.
8. Avoid Buy-Here Pay-Here Lots
Some lots will offer you a vehicle on the spot as long as you pony up the cash. Oftentimes lots like these sell questionable vehicles that will prove to be a poor investment very quickly. A car is a big purchase, so treat it like one and don’t settle for anything sketchy.
To avoid buying a total junker, request they show you the Carfax report to ensure it’s not a salvage title, and see if you can even take it to a mechanic before purchase. Take note of any warranty and the period it expires. This can save you a world of trouble.
9. Bring a Savvy Friend
Do you have a friend who knows cars really well? A mechanic, perhaps? If so, take them with you while you shop around. This person can help you look for any damages, mechanical flaws, and so on. When buying a car it’s really easy to overlook the little things, like a slight crack in a taillight. It’s even harder to tell when an accident has been repaired without being documented. A trained eye, like that of a mechanic, can spot this.
If you don’t have a mechanic friend or someone who’s car savvy, take the car to a mechanic before purchase. If that’s not possible, bring it immediately after to ensure the car is in the shape the dealer says it is — before the warranty expires.
10. Read Every Word of the Contract
Not every lender or car salesperson is trying to lie to you, but it’s important that you read every detail of the loan presented to you. It’s easy to get swept up in all the talking during the presentation of the loan terms, and even easier to miss something. Reading the contract carefully will take time, but it’s a great way to see the full amount you’ll be paying laid out in front of you.
If things look accurate, great. If not, bring this up to the lender. When looking at that final number and total cost after interest, ask yourself one more time if you can truly afford this, and truly need this. It’s never too late to walk away if the price is more than you budgeted for.
Bad Credit Auto Loans: Not the End of the World
Don’t let your bad or absent credit score get you down. There are numerous steps you can take to find the right lender for bad credit auto loans. Focus on your end goal: getting a car you can afford. Then, follow the steps outlined above and don’t fall for the first car or offer you’re presented with. If things don’t work out this time, use the next couple of months to work on your credit score some more. Find out additional steps you can take to prepare for this large purchase with our Ultimate Guide to Buying a Car.
If you stay the course and take your time, you’ll soon be cruising in a car all your own. There’s no sweeter ride than the one you bought yourself. See you on the road, future car owner!