After all, what financial institution would take a risk on someone with a poor credit score and preexisting debt? The answer may surprise you. While most financial experts don’t recommend taking out a new car loan if you are dealing with bad credit, getting approved isn’t as impossible as you might think.
If you desperately need a new vehicle to get to work or just around town, keep reading to see how you could possible get the financing you need.
Can You Get Financing with Bad Credit?
The financial crisis caused by the collapse of the housing market is no longer being felt, and now lenders are seeing the potential value in approving what was considered a high-risk loan.
Lenders know that a new car has more value, and this will help repay the loan is the buyer is incapable of making the monthly payments. A new vehicle typically requires less maintenance, and this means that the buyer’s money is more likely to go towards repaying the loan and not on expensive repairs. Even with bad credit, lenders are now more willing to offer financing on a new vehicle.
This also applies to getting approved through the dealership’s financing department. Many new car dealerships are also willing to approve a bad credit loan application, though the interest rates are usually higher. Even though the dealership may not be making a large profit off this vehicle sale, they are establishing a relationship with the customer that could last for years. This is where car dealerships expect to make their profit, on referrals and return sales.
The Steps You Need to Take
Knowing the steps you need to take before you apply for a bad credit new car loan can dramatically improve your chances of being approved. There are only a few things you need to do, and when you are driving off the lot in your new vehicle you’ll be glad that you did.
Here are the few details you need to take care of before you start shopping for your new car.
Prep Early
The first, and most important step, if you want to finance a new vehicle and have bad credit is to start preparing for your purchase early. If possible, at least three months in advance.
Lenders also know that emergencies can happen, and not everyone will be able to take the time to prepare to apply for vehicle financing well in advance. Don’t worry, most lenders will still work with you and give you the time you need to get your paperwork in order. If you are lucky enough to be able to plan your new vehicle purchase in advance, here are a few things you can do to help the loan process go more smoothly.
- Experian recommends getting a copy of your credit report at least 3 months before you are planning on financing a new car. This will give you time to take care of any items that need your immediate attention like errors and outstanding debts.
- Since your credit rating is below 620 and is considered subpar scheduling a meeting with a credit counselor could help get on the right track towards being financially responsible.
Your credit report will have black marks, and they cannot be removed unless they are errors. If you are meeting with a credit counselor they can help you get any mistakes erased from your reports, and this could cause your score to rise before you apply for the loan. Not only can this increase your chances of being approved, it could also result in lower interest rates.
Get Pre-approved
Once you have a copy of your credit report and have taken care of any errors and outstanding debt, it is time to start applying for bad credit new car loans.
Since you already know that your poor credit score will translate into higher interest rates, most financial experts recommend applying with several lenders. While one might offer you a loan with an interest rate of 18 percent, another might be lower.
Some of the financial institutions that might be willing to offer approval on a bad credit auto loan include,
- Banks
- Credit unions
- Online lenders
According to Experian applying for multiple new car loans won’t hurt your credit, since lenders will realize that you are only searching for the best interest rate.
After you have been pre-approved for new car financing it is time to choose a dealership.
Bring Documents
Appearing well organized will go a long way towards convincing a potential lender that you really are a low risk option, regardless of your bad credit score.
The documents that all finance companies will require when you are applying for a new car loan with bad credit typically include,
- Driver’s License
- Copy of your most recent pay stub
- Utility bill in your name
- Three personal references
With these documents you can establish your residency, ability to make the monthly auto loan payments, and provide the potential lender with a list of contacts. Even though you already know that you have a below subpar credit rate, bringing a copy of your score or recent report might also be helpful when you are discussing possible financing with a potential lender.
If any other documents are needed the lending agent will let you know before the initial meeting is over. These can usually be brought when it is time to sign the loan agreement.
Stay in Your Price Range
One important tip to remember is that just because you can afford a higher priced car, this doesn’t make it a smart purchasing decision. Before you even start looking for a new car, you should already know exactly what you can afford in monthly loan payments. This way you don’t end up borrowing more than you can comfortably afford to pay back.
Even if you can still afford the loan payments each month, it is still not a good idea to go above the amount you were originally planning to seek approval for.
The extra money you are saving each month by sticking to your original loan amount can be used to pay other bills or set aside for your next down payment. Even if your credit score is still poor after the loan has been paid off, being able to make a larger down payment might allow you to still qualify for lower interest rates the next time you apply for a new car loan.
Know the Difference Between a “Good” Deal and a “Bad” One
Auto Industry experts warn bad credit new car buyers to be careful, and pay attention to the numbers before signing any loan agreement. Just because you were approved for the auto loan, doesn’t mean that you are necessarily getting the best deal for your money.
Make sure that the total repayment amount, with interest isn’t too high, and refrain from accepting “cash back offers”. These are often made to car buyers with bad credit in an effort to keep them from noticing how much they are paying in interest rates.
Don’t “trade-up”
It can be tempting to take advantage of a car dealership’s offer to “trade up” to a higher end vehicle, especially if your monthly payments won’t increase at the time. This is a common incentive new car dealerships frequently offer to their credit challenged customers.
Even though it can seem like a great way to purchase a nicer new car, you will end up paying extra on your next loan. After you’ve made you monthly car loan payments on time for one year, most credit counselors recommend applying for refinancing with a lower interest rate instead of trading up to a nicer vehicle.
The lower interest rates will help you save money that can be used to either pay the existing new car auto loan off, or put aside for a down payment on a newer model.
Congratulations! You’ve Become Financially Responsible
Once you’ve done your research, looked for a vehicle in your price range and made all your payments on time, you have just taken a big step in becoming financially responsible. Not only have you improved your credit score, but you have also established healthy financial habits that will help you anytime you need to make a large buying decision.