Are you in the market for a car, but worry that your bad credit is standing in the way of getting a loan? The good news is that you can get a car loan when you have bad credit – you just need to work with the right lender and plan accordingly with these steps.
Knowing Your Credit Is the First Step
Before you head to a dealership or look up vehicles, you need to know your credit score and what’s listed on your credit reports.
The majority of lenders look at your FICO score, so that's what you should look up, too. See if your bank, credit union, or credit card company provides free access to your FICO score. If not, you can pay a small fee with the credit bureaus or directly from FICO to get it.
You should also have a look at your credit reports. You're entitled to a free copy of your reports every 12 months from each of the three major credit bureaus: Equifax, TransUnion, and Experian. These can be requested at www.annualcreditreport.com.
It’s important that everything listed is accurate. If you notice any errors, you can dispute them to the reporting credit bureau. They're required to investigate, and if they find your claim to be right, the inaccurate information will be removed.
From there, you can move onto the next step: budgeting and researching.
Research and Budget for a Car Loan
Once you know where you stand credit-wise, you can research various vehicles and plan a budget.
First, you should calculate your debt to income (DTI) and payment to income (PTI) ratios. For a quick estimate, you can use our Car Loan Estimator and Payment Calculator, but let’s explain what these ratios are, and how you can calculate them yourself.
Your DTI ratio looks at your monthly expenses and compares it to your pre-tax monthly income. To find your DTI ratio, add up all your monthly bills – including estimated vehicle and insurance payments – and divide the total by your monthly pre-tax income. Bad credit lenders usually deny applicants if their DTI ratio is over 45% to 50% of their monthly income.
Your PTI ratio looks at the percentage of your monthly income needed for your car payment. It's found by taking an estimated car plus insurance payment and dividing the sum by your pre-tax monthly income. Subprime lenders typically won't accept a PTI ratio that's over 15% to 20%, so this calculation gives you a good idea of where your car buying budget stands.
To find the typical maximum monthly payment range, multiply your pre-tax monthly income by 0.15 (15%), and then by 0.20 (20%). You should opt for a vehicle with a monthly payment that’s no more than 20% of your monthly income, although you should try to keep it as low as possible.
After you calculate your DTI and PTI ratios, you can research vehicles and find a few that fit within your budget. It’s important you pick something that meets your everyday needs – it isn’t the time to aim for your dream car if your credit isn’t in tip-top shape.
When choosing a vehicle, make sure you consider insurance, fuel, repair costs, taxes, and additional fees associated with car buying. All of these things should be accounted for in your budget.
Get All Your Documents Together
Once your numbers are crunched, you can gather all the documents you need to get the financing process started. You’re going to need to bring in additional documents because you’re more than likely going to be dealing with a subprime lender or buy here pay here dealer – both work with consumers who have bad credit.
Requirements vary, but you typically need to bring in proof of income, proof of residence, proof of a working phone, and a valid driver’s license or state I.D. On top of that, you’re going to be expected to make a down payment; you can use trade-in equity, cash, or a combination of both to meet the down payment requirement.
The Last Step: Find a Dealership
The final step to take is to actually find a dealership that's willing to work with you. Luckily, you don’t have to go far to find one – we can do the searching for you!
At Auto Credit Express, we work with a nationwide network of special finance dealers that have the subprime lenders you need. Don't drive around in circles looking for a dealership that can help – save time and money by having a destination in mind!
Simply fill out our easy and hassle-free auto loan request form, and we'll begin the process of matching you to a local dealer. There's never any cost or obligation to buy, so what are you waiting for? Get started right now!