Credit scores can plummet due to various reasons, and a bad credit does make it tough to secure a car loan. Some lenders may only consider you for subprime car loans, which often come with less favorable terms and higher monthly payments. However, it isn’t all bad news – you can still buy a car with bad credit if you know how to proceed systematically.
Pre-qualify with banks and credit unions
Please ensure you are aware about credit score and the factors leading to it. Credit reports can be downloaded online from various websites after entering certain details. It is difficult to pre-qualify for a car loan with bad credit, but if you have a relationship with your bank, you might be able to find a manageable car loan. Credit unions are nonprofit organizations usually owned by their members so they could be slightly more open when it comes to lending money to someone with bad credit. Account holders have to be members first, but these requirements are easy to fulfill.
Finalize terms with a dealer
If you finance through a dealer, ensure the terms are set in stone before signing. In case the terms aren’t final, there is a risk of having to shell out higher monthly payments or an increased down payment in the future.
Steer clear of subprime lenders
The option of subprime lenders is tempting when you need a car loan but are stuck with bad credit. These lenders make the process of purchasing a car seem stress-free and smooth. However, these loans are attached to sky-high interest rates and won’t help boost credit score. Some subprime loans also list your vehicle as collateral so if you can’t make payments, you might end up losing the car!
Consider a co-signer
Find someone you trust – a friend or cousin – and ask them to be a co-signer on the loan documents. Co-signers lower some of the risk for lenders as they assume responsibility if you default on payments. Adding a co-signer can be a strong negotiating tool, and usually results in a lower interest rate. But make sure you can pay up before taking on a co-signer.
Remember, lower monthly payments seem like a feasible option, but you could pay more for the car over the life of the loan because car loans for bad credit come with higher annual percentage rates (APR). Shop around and look for a loan that offers the lowest APR over the shortest period of time so monthly payments are manageable along with reasonable interest rates.