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Car Loan with Bad Credit: All You Need to Know to Get a Good Deal

  • Auto Insurance
  • Renee Martin
  • 11 minutes

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Getting a car loan with bad credit might seem impossible.  The good news is that it is not. Here’s how you can find some good deals on car loans with bad credit

Having a strong credit score can help you get approved for a car loan with favorable terms. However, people with bad credit still have options. A car loan does not require a minimum credit score. Therefore, people with bad credit only need to find a suitable lender or loan to get behind the wheel. 

How to apply for a car loan with bad credit?

One of the variables that lenders assess when considering whether or not to approve a person for a car loan is their credit score. Lenders will deem your credit score fair or poor when it falls below 670 in the FICO range of 300 to 850.

With a score like this, you may not be qualified for all loans. To make matters worse, the few loans you are eligible for may cost more. However, with a little bit of research, it isn’t impossible to find a loan that works for you. Want to increase your chances of getting a car loan with bad credit? Follow these tips:

Examine your credit report and, if possible, improve it

Before making a significant purchase that may require a credit check, it’s always a good idea to receive a free copy of your credit reports and score. By doing so, you’ll be able to predict what a lender will look for while analyzing your credit.

When you check your credit score ahead of time, you allow yourself to make changes and improve your scores before submitting an application.

Improving your credit score may enable you to obtain better terms and a cheaper interest rate. This saves you money over time. Here are some suggestions for raising your credit score:

Make your payments on schedule: One of the essential components of your credit is your payment history, and keeping a clean record is one of the best methods to preserve decent credit scores. If you have any past-due payments, make sure to pay them.

Reduce your debt: Reducing your debt improves your credit utilization ratio while putting you in a better financial position when asking for a loan. Divide your entire revolving credit balances by your overall credit limits to get your utilization ratio. For the best results, keep your usage ratio under 30%.

Determine how much you can spend

When buying a car, there are two major factors to consider. One is the amount of money you’ll need for a down payment. The second is the cost of owning the car on a monthly basis. Figuring out your monthly payment is a crucial step in the car-buying process. This will dictate how much you can afford. So make sure you calculate your monthly expenses, including your loan payment, insurance, gas, and upkeep. The smaller the down payment, the more expensive the car will be.

Place a down payment

When you buy a car, you’ll normally offer a down payment. The down payment goes towards purchasing your car. The remainder of the purchase price is financed and repaid over time. In theory, the more money you can put down when buying a car, the lower your loan amount.

A larger down payment also minimizes your lender’s risk, which may help you get a cheaper interest rate on your loan.

Saving for a down payment isn’t always easy. So, you might want to put off buying a car until you can afford a larger one. Doing this could make your application more competitive, cut the amount you owe, and help you lock in a cheaper interest rate.

Read: Auto Finance 101: How do car loans work?

Get preapproved for a car loan

When a lender reviews your credit and financial information, they will tell you how much of a loan they are willing to offer. This not only gives you a good idea of what you can afford but also alleviates some of the stress of not knowing whether or not you’ll get approved for a specific vehicle.

Once you have a preapproval letter, you can utilize this record to negotiate a good purchase price. It will also help you understand which vehicles are in your price range.

Look for the best loan possible

When you have your affairs in order and are ready to apply for a loan, it’s a good idea to shop around first. If you’re having difficulties getting approved for a loan from a traditional lender, look into lenders who specialize in helping people with poor credit.

These lenders may charge higher interest rates, but they enable people with bad credit to get approved for loans.

You may wind up applying to many lenders in your pursuit of the best terms and lowest interest rate. As previously stated, an inquiry is noted in your credit reports each time a lender investigates your credit because you’ve made an application.

However, by applying with various auto lenders over two weeks, these queries are consolidated into one.

car loan application form

Where to look for a car loan with bad credit?

Before you apply for a car loan, you should familiarize yourself with the numerous borrowing alternatives available to you. Some lenders will lend to someone with bad credit, while others will refuse.

Knowing how each lender operates ahead of time might help you save time and effort during the application process. The most popular types of vehicle finance are as follows:

Captive financing: This sort of financing is held in-house by the manufacturer. That means you’re not only buying a car from a dealership, but you’re also financing it with them. When it comes to secondhand cars, this form of financing isn’t always possible.

Captive lenders can be generous and have the interest to grant you a loan to buy their car. So, these loans may be easier to obtain for someone with bad credit.

Dealer-arranged financing: In this case, the dealer works with various lenders to locate and get a loan for your vehicle. Following your application, your lender may present you with numerous loan options. Choose the one with the best terms.

This option may benefit someone with bad credit because your information will be shared with numerous lenders at once, including at least a few who will accept applicants with bad credit.

Credit unions and banks: Banks and credit unions might be able to help you finance your car. You need to apply with a lender and receive a preapproval, which you would then take to the dealership, just like any other loan. This loan is repaid on a monthly basis directly to your bank or credit union.

This could be an excellent choice for folks who already have a bank or credit union relationship, as they may ignore faults in your credit history and use your experience with them as proof of your creditworthiness.

If you cannot visit a branch, you can apply for many bank loans online by searching for vehicle loans on bank websites.

Read: Can car loan refinancing help you save money?

More car loan options

Car loans are now available from online banks and fintech (financial technology) organizations. You can complete the application process for these loans online, and interest rates vary greatly depending on the lender. To locate one of these deals, conduct a general online search for auto loans, focusing on organizations that operate entirely online. 

You can also use a single aggregation website to receive multiple loan offers using a single application. Just be aware of unknown firms and do your homework to see if the lender you’re considering is reliable and provides a good price.

“Buy here, pay here” is a phrase that means just that. These lenders specialize in working with customers who have no or bad credit. They fund the purchase of the vehicles on their lot themselves, rather than forwarding your loan to an outside lender.

Exorbitant interest rates, high down payment requirements, and a potentially limited car selection are all disadvantages of this sort of financing.

car loan with bad credit

Few more tips for obtaining a car loan.

If you need a car right now and don’t have time to improve your credit before applying for a car loan, here are some options to consider.

Get a cosigner on the loan: A cosigner is someone who agrees to apply for a loan with you and shares your responsibility for repayment. In circumstances where the principal applicant’s credit history is less-than-perfect, cosigners often have established solid credit and give the lender peace of mind. Both you and your cosigner will most likely face credit ramifications if you miss payments or default.

Make a larger down payment: The greater your down payment, the better your chances of getting a car loan. Down payments not only minimize the amount you need to borrow but also show lenders that you’re committed to repaying your loan.

Opt for a less expensive vehicle: Finding a less expensive car will minimize the amount you need to borrow if you can’t get a loan authorized. Even if your credit isn’t excellent enough to get you a big car loan, a lender might accept you for a smaller one.

Check out second-chance car loans: These loans, intended to provide people with negative credit a second opportunity, do exactly what they say. Turned down for a traditional auto loan? A second-chance lender would try to find you financing choices that you’ll be eligible for.

Choose a reliable lender with a track record of excellent client experiences when looking for a second-chance car loan. A few credit unions may offer these loans. However, these loans will probably have hefty interest rates and costs, so assess your options carefully.

Read: What to do if you have a totaled upside-down car loan?

What effect does a loan have on your auto insurance?

When you take out a car loan to buy a car, you’re not the only one who has a stake in it. The lender has a financial stake in your car — at least until it’s fully paid off — and will want to safeguard their investment.

To protect your joint investment, your lender may require you to add specific types of coverage to your insurance policy. This usually implies that your lienholder will be mentioned on your vehicle insurance policy alongside you.

Many lenders require owners to purchase comprehensive and collision coverage for their cars. Comprehensive coverage covers damage to your car that occurs while not being driven. It covers damage from falling objects, fire, hail, wind, vandalism, theft, and more. Collision coverage protects your vehicle against damage caused by an accident, regardless of who was at fault.

Gap insurance: is it required?

If you purchased a new car using a loan, you should consider adding gap insurance to your car insurance policy. You won’t have your new car if it’s stolen or totaled, but you’ll still have to pay your car loan. If you have gap insurance, your policy will reimburse you for the car’s actual cash value (ACV), which may be less than the amount you still owe on the loan.

Gap insurance will cover the “gap” between the ACV and what you owe. Gap insurance ensures that you are not stuck paying for a car you no longer own. Even if your lienholder doesn’t require you to get gap insurance, it is a good idea to do so. Know more about gap insurance here.

How to file a claim when you have an auto loan?

When you make a claim, your car insurance company can make the check in your name and your lienholder. Keep in mind that your lienholder is also recorded on your car insurance policy.

Different lienholders will have different requirements. However, before your lender endorses the check from the insurance company, they may require you to prove that the money is being used for car repairs.

Before you sign a check, check with your lienholder to see what they require from you. Also, keep any and all documentation connected to your car repairs in hand. Know more about filing car insurance claims here.


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