Bad credit can affect your auto loan in many different ways. Here are four ways bad credit can affect your next car loan, and some workarounds that could help.
1. May Not Qualify on Your Own
As a bad credit borrower, you may find lenders to be a little wary of rolling out the red carpet on an auto loan. While there's no minimum standard credit score that gets you approved or denied for financing, the better your credit score, the more likely you can handle yourself when it comes to repaying a car loan. If a lender is on the fence about your credit score they might not approve you on your own. Sometimes they require you to bring in the help of someone with a better credit score.
Solution: Get a cosigner
Getting a cosigner could be the solution to your car buying blues when you have a low credit score. A cosigner agrees to make payments on the loan if you miss them or fall behind, and also "lends" you their credit score so you can meet the lender requirements.
In order for a cosigner to be helpful, they should have a credit score better than yours, ideally around 660 or higher. A cosigner also needs to meet all the lending requirements that you do when being approved for a car loan since they have to prove they can repay it if you can't. This gives a lender peace of mind and may increase your odds of getting an auto loan with poor credit.
2. May Qualify for Higher Interest Rates
One of the bigger bummers when it comes to car loans is that the lower your credit score is, the higher the interest rate you're likely to be assigned. This means that bad credit makes auto loans more expensive (interest is the cost of borrowing the money). The interest rate you qualify for is influenced mainly by your credit score.
Solution: Larger down payment
Fortunately, you can offset the cost of higher interest rates by borrowing less to begin with. The more money you can bring in as a down payment, either in cash, trade-in equity, or a combination of both, the more likely you are to pay less on your loan overall. Depending on how much money you can pay upfront, you may even be able to knock your loan down low enough to qualify for a lower interest rate.
3. May Have Fewer Vehicles to Choose From
The bad credit borrowing process with subprime lenders typically means getting approved for financing first before you choose a car. It's almost the opposite of the process for an auto loan when you have good credit and when you work with direct lenders. With good credit, you can usually pick out a vehicle from any seller and worry about financing later, since having good credit opens more financial opportunities.
Bad credit borrowers often don't start with car choice, though. In this case, you need to find the right lenders to work with, usually through a special finance dealership. Once you're qualified for financing, the lender sends the dealer a payment call, letting them know that you can be financed for up to a certain payment amount each month.
The dealer then chooses a selection of vehicles they have available whose price fits into your given budget. Essentially, you have to pick from dealer stock and shop within what you’re qualified for.
Solution: Try for pre-approval
Even though it may be easier to find an auto loan through a special finance dealership when you're struggling with credit issues, preapproval with poor credit isn't unheard of. In fact, having a long-standing account with a bank or credit union can be a good foot in the door when it comes to getting a car loan. Bad credit borrowers tend to have more luck with credit unions since they're not-for-profit organizations that can often pass savings on to their members.
4. Impacts Loan Chance With Traditional Lenders
A preapproval with poor credit is possible in the right circumstances, but it can still be difficult to get if your credit score is worse for wear. Bad credit can definitely put a damper on your auto loan opportunities with traditional lenders such as banks, credit unions, and online lenders. Most of these financial institutions require you to have a credit score of around 660 or above to even be considered for financing.
Solution: Shop with a subprime lender.
There are lenders that are prepared to work with borrowers who are in tough credit situations, though, called subprime lenders. These lenders look at more than just your credit score to help see if you're a good fit for an auto loan. Not all dealerships work with lenders that can finance bad credit borrowers, so it's important to know where to turn.
Ready to Turn Your Credit Around With a Car Loan?
It can be hard to know where to turn when you're in a bad credit situation and need an auto loan. Here at Auto Credit Express, we've got you covered! Simply fill out our fast, free car loan request form and get started toward your next auto loan now!
The even better news? Getting a bad credit car loan can help you build credit with each on-time payment! This means your credit score can improve over your loan term, and if you build it up enough, you may not need our help, or a bad credit car loan next time around! So what are you waiting for – get started on your next auto loan today!