Getting a good deal on a bad credit car loan starts with being prepared for a trip to the dealership. We’ve got nine ways to prepare yourself before your next vehicle purchase!
1. Consider preapproval
Not only could preapproval get you a good deal on your next car loan, but it’s also a great negotiation tactic that could save you money. Preapprovals are offered by direct lenders, like a bank or credit union.
If you can manage a preapproval, it can be a great bargaining chip. You can tell a dealer that you’ve already been preapproved but that you’re open to other lending institutions if they can offer a lower interest rate. The dealership could then run your application through their lending partners, and if you qualify, you may be offered a lower rate in an attempt to get you to finance with them.
Bad credit borrowers can sometimes struggle to meet a direct lender's requirements for preapproval, but it’s worth a try for the advantage. Credit unions can be a little more forgiving than big banks or some captive lenders of automakers.
2. Consider a used car
When you’ve got poor credit, shopping for a manageable car loan should be a priority. This often means shopping for a used vehicle over a brand new one.
Generally, bad credit borrowers have a better chance of qualifying for a used car because auto loan amounts tend to be less, due to lower vehicle selling prices. The higher the loan amount, the more hesitant a lender may be to approve you for the loan if your credit score isn’t great. Opting for an affordable, used car can improve your chances of an auto loan approval. And if the loan is considered low risk because the amount is lower, it could mean qualifying for a better deal.
3. Research your vehicles
Having a lower credit score can sometimes give you fewer vehicle options, but it’s still a good idea to shop for a car that can retain its value. A vehicle with good resale value is valuable to any borrower, but especially to bad credit borrowers. By financing a car that retains its value, there's a higher likelihood of being in an equity position when you need to sell or trade-in the vehicle. This is helpful down the line because it can mean more cash in your pocket or more money down on your next purchase.
Some vehicles hold their value better than others. Brands like Subaru, Honda, Jeep, and Toyota typically have pretty decent resale value because they’re desirable by buyers. If there’s a vehicle you prefer, do some online research to see what the car is likely to be worth in a few years and if the selling price makes sense compared to its projected value over time.
4. Save for a down payment
It’s hard to overstate the importance of a down payment if your credit score is poor. Making a substantial down payment is one of the easiest ways to get a good deal on a car loan. If you’re working with a subprime lender for your next car loan, you’re most likely going to need a down payment of at least $1,000 or 10% of the vehicle’s selling price.
A down payment requirement can be difficult to meet since it’s not always easy to save money. However, putting cash down has many benefits to you and your auto loan. Benefits include a lower loan amount, fewer interest charges, higher approval odds, more vehicle choices, and a lower chance of falling into auto loan default.
If you already have a vehicle, its equity can be used to meet that down payment requirement as well. The latest stimulus checks and tax season could also provide you with the cash you need to qualify for auto financing with poor credit. Using windfalls of cash like this – if you qualify for them – can make it easier to get a good deal on a car loan.
As a bonus, some lenders may be willing to offer a lower interest rate if you have a large down payment.
5. Rate shop
Rate shopping involves applying for a car loan with a few different auto lenders. You may be hesitant to apply for a few loans all at once, due to the risk of harming your credit score with the hard inquiries. However, rate shopping minimizes this damage.
If you apply for a car loan with multiple auto lenders within two weeks, only one hard inquiry impacts your credit score. All hard pulls are reported on your credit, but only one carries any weight. To look for the best deal for your situation, plan out the lenders you want to apply with and apply in a short window of time to lessen new credit damage. This way you can compare all the rates you can qualify for before diving into the first offer you get.
6. Look for rebates for bad credit buyers
Typically, special rebates offered by automakers are only available to borrowers with good credit. However, some automakers, like Kia, offer programs for borrowers with less than perfect credit.
Rebates are offered by auto manufacturers, and their goal is to incentivize a borrower to finance with their lending arm. It might take a little work on your part to find an automaker that offers rebates for bad credit borrowers, but it could mean getting a good deal and saving money on your next vehicle purchase.
7. Get a shorter loan term
When you finance a car, you should take care to choose a loan term carefully. The longer you finance a vehicle, the more interest charges you must pay.
Auto loans almost always use a simple interest formula, which means your interest charges add up daily based on your loan balance. So, if you choose a longer loan term in an attempt to lower your monthly payment, it means you have a higher loan balance for longer, which means paying more interest on your loan.
If you can manage it, choose a vehicle with a selling price that allows you to afford the monthly payment within 48 to 72 months. Remember that cars are depreciating assets that lose value every year, so paying it off quickly is worth it.
8. Skip unnecessary add-ons
There are some dealer add-ons that make sense, but a few are probably not worth your hard-earned cash. For example, VIN etching, paint or fabric protection, and rustproofing are largely considered a waste of money by many borrowers.
These add-ons may not add any value to your car, but instead, just add to your total loan amount. A lot of these extra costs can be rolled into your auto loan, which means more interest charges and a higher loan amount. If you’re looking to save money on your next car loan and get a good deal, skip the unnecessary add ons. If there is one you’d like to purchase, ask a lot of questions and see if the price is negotiable.
9. Work with the right lender for your bad credit
With a lower credit score, it’s important to apply for vehicle financing with a lender that can assist you with your credit challenges.
Many traditional auto lenders can’t work with borrowers in bankruptcy, help new borrowers with no credit history, or help borrowers who have a repossession on their credit reports. If you’re struggling to meet a traditional auto lender’s requirements, then consider a subprime lender through a special finance dealership.
Special finance dealerships are signed up with subprime lenders that specialize in helping bad credit borrowers get the auto loans they need. Working with the right lender for your credit situation can greatly improve your approval odds.
Ready to Move on a Car Loan?
Finding a lender that’s able to help with credit challenges can be easier said than done. We’re trying to make it easier for bad credit borrowers to get the connection they need to get the vehicle they need.
Here at Auto Credit Express, we’ve created a network of dealerships that’s coast to coast. If you’re in need of a dealer that has bad credit lending resources, fill out our free auto loan request form and we’ll look for one in your local area.
