Most people with good credit can walk into a dealership, pick out the vehicle they want, and sign the loan paperwork. People with bad credit, on the other hand, need to understand that their car buying experience is going to be a little different. These five steps can help you take on the bad credit car buying process with confidence.
Step 1: Know Your Credit
Before you can begin looking at vehicles, you need to know where your credit stands and what’s on your credit reports. You may be surprised by what you see.
You can get a complimentary copy of your credit reports every 12 months from the three major credit bureaus – Experian, Equifax, and TransUnion – by visiting www.annualcreditreport.com. Make sure all the information listed is correct. If something is inaccurate, make sure you dispute it with the reporting credit bureau(s) as soon as possible.
As for your credit score, most lenders check your FICO score. See if your bank, credit union, or credit card provider offers free access to your FICO score. If they don't, you can pay a small fee to see it with the credit bureaus or at www.myFICO.com. Then, you can look up the interest rates people in your credit score range typically qualify for so there aren't any surprises later on.
Step 2: Create a Budget
Once you know where your credit stands, you can then determine your budget. Using our auto loan estimator and payment calculator, you can get an estimate on how much car you can afford. Keep in mind that these calculations don’t include outside costs such as fuel, insurance, maintenance, taxes, and title and license fees.
Make sure you calculate your payment to income (PTI) and debt to income (DTI) ratios as well. The lender is going to calculate these, but you should know what they are ahead of time.
Your PTI ratio determines the allowed maximum amount of your monthly vehicle payment. Lenders want to make sure that you can comfortably afford the loan. Generally, the maximum PTI ratio subprime lenders accept falls between 15 and 20 percent. You can calculate your own PTI ratio by multiplying your pre-tax monthly income by 0.15 and then by 0.20. This gives you a maximum payment range you can use to better identify what fits your budget.
Your DTI ratio focuses on your total monthly expenses compared to your pre-tax monthly income. To calculate this, add up all of your monthly bills (including the estimated car payment plus auto insurance) and divide the sum by your pre-tax monthly income. Lenders typically won't extend a loan if your DTI ratio exceeds 45 to 50 percent.
Step 3: Research Vehicles
After you crunch the numbers, you can finally check out models to consider. Make sure you pick a vehicle that meets your everyday needs and fits within your budget.
Read reviews from current and former owners to see what they liked or disliked. If you’re considering a specific used car, it’s important to have the proper documents, look up the vehicle’s history, and have it inspected by a certified mechanic. The more informed you are about a car, the more confident you’re going to be when you buy it.
Step 4: Gather all Documents
When you have bad credit, you’re generally going to have to work with a subprime lender. These lenders work through special finance dealers and understand various bad credit situations. Because you’re going to be dealing with this type of lender, you need to bring in additional documents to get approved for financing.
Subprime lenders typically want to see proof of income, proof of residence, proof of a working phone, and a valid I.D. You also usually need to make a down payment with a bad credit auto loan, and you can either use trade-in equity, cash, or a combination of both to meet the requirement.
Step 5: Find a Dealership to Work With
If you’ve gathered all you need to get started with buying a vehicle with bad credit and are ready to find a dealership, we’ve got you covered.
At Auto Credit Express, we’ve been helping bad credit car buyers like yourself get the financing they need by connecting them to local dealers that have the proper lending resources available. What’s even better? Our service is free and quick. To get the ball rolling on your financing journey, simply fill out our auto loan request form today.