Credit and Buying a New Car
If you have no credit history or poor credit, obtaining a car loan may feel daunting. Lenders look at your credit history, and if you have a low credit score, have been late on payments, have a substantial amount of debt, or declared bankruptcy, lenders consider you a credit risk. However, there are ways to help improve your chances of finding a lender who will help you get an auto loan. Let’s look at 10 tips to help you get an auto loan even if you have bad credit.
Check your credit score before shopping for a loan
One of the first things a lender will look at is your credit score. Anything under 700 sends a red flag to lenders. Check your score before applying for a loan or speaking to a lender, and try to find out why the numbers are low. Make sure there are no past-due bills to pay and dispute any credit report errors. The cleaner your credit report is and the more you understand why your credit score is low, the easier it is to explain those numbers to the lender.
Use your credit wisely
Before you apply for an auto loan, make sure you’re on top of your credit cards or loans. Pay bills on time, don’t purchase big items, try to avoid opening new lines of credit, and don’t take on any new loans or debt. This gives you a more favorable record that lenders want to see.
Research current interest rates for an auto loan
Do your research to get the most up-to-date information on interest rates. The more you understand about current interest rates for auto loans, key terms included in an auto loan, and the kind of loan that fits into your budget, the better prepared you’ll be when you do apply for a loan. In addition, if you’re planning on buying a used automobile, know what the Kelley Blue Book value of that car is.
While getting preapproved for a loan can be challenging when you have bad credit, it’s not entirely impossible. If you have a good relationship with your bank, the lender may help to preapprove you. Credit unions are more lenient about preapproving its members for a loan, so speak with your credit union representative if you’re a member. Going to a dealer with a preapproved loan may help you negotiate better loan terms.
Shop around for lenders
It’s wise to shop two or three lenders to get the best rate. Many lenders specialize in loans for those with bad or poor credit and will compete for your business. Lenders look at variables besides your credit score, such as your income, job stability, and residency, so while you may have a low credit score, different lenders look at your overall financial health differently.
Keep in mind that when a lender checks your credit score, it lets the credit bureau know that you’re thinking about taking on more debt, which may lower your credit score. The longer the low numbers sit on your report, the less negotiating power you may have. Try to choose your lender within a 10- to 14-day period.
Look for a shorter loan term
When you’re looking at the overall loan term, choosing a shorter term generally has lower interest rates than a longer one. Long-term loans generally offer smaller monthly payments with higher interest rates. Short-term loans have higher monthly payments with lower interest rates. If you can make the higher monthly payments, you’ll pay less for the overall amount of the vehicle.
Make a big down payment
Many auto dealerships require a minimum 10% down payment on the vehicle if you have bad credit. If you can make a larger down payment, you can reduce the total amount of money needed for the loan, and you may have a lower interest rate as well as reduced monthly payments.
Get a cosigner
If your credit is particularly bad or you have no credit history, see if you can get a cosigner. Lenders will look at the cosigner’s credit history, income, and job stability to see if they are eligible for a loan. If so, the cosigner can often get better loan terms than someone who appears as a credit risk. A cosigner commits to paying off your debt should you become unable to make the payments, so it’s a big responsibility for someone to cosign for you.
Don’t add extras to the car
If you have bad credit, it’s better to avoid adding luxury extras to a new car. Sunroofs, leather seats, high-end audio systems, and chrome wheels add to the overall cost of the vehicle. If you need to take out a high-interest loan due to your poor credit, you’re already paying more for the vehicle than someone who has a low-interest loan.
Adding extra features only increases the overall cost and monthly payment of your new vehicle. When you have poor credit, choose a modest vehicle, and in the future when you have built your credit history, you can think about upgrading to a car with luxury extras.
Learn about subprime lending conditions
Subprime lenders work with low-income buyers who have poor credit or no credit. While subprime loans can be a good option for you, it’s important to understand all of the terms when looking into them. Most subprime loans have higher interest rates and fees than conventional loans, and they usually require a larger down payment. If you’re already planning on making a large down payment, consider a subprime payment, but make sure you read the repayment terms before signing off.
Our professional team at Hiley Mazda of FortWorth is available to help you with your car loan needs. Feel free to give us a call at 833-218-0298 so we can discuss financing options to fit your budget and lifestyle. We look forward to speaking with you soon!
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