When you're looking for a car loan, it's important to get one that meets your individual needs. But, there are a lot of factors to think about when you're searching for an auto loan that may not be so obvious – especially if you're trying to get a bad credit car loan.
What to Look for in a Car Loan
The thing you should look for as a bad credit borrower is an auto loan that can help you improve your credit score. When you get a car loan, you need to look for an affordable price on a reliable vehicle, a decent interest rate for your credit situation, and the shortest loan term you can comfortably repay.
All of these items are important. How you handle your auto loan can determine how much you end up paying for a car, and how much your credit can improve during the course of your loan.
Repairing Your Credit With a Car Loan
If you're looking for an auto loan to help you repair your credit score, you're likely to have better luck working with a subprime lender. Subprime lenders know that you're more than a number, and look at a myriad of factors that give them a better picture of your financial and credit situations. For these reasons, they can typically assist a wider range of car buyers than more traditional lenders, who base auto loan approvals solely on credit scores.
Car loans can improve your credit because they impact several areas of your credit reports, which combine to make up your credit score. FICO credit scores are the most common scoring model used by auto lenders, and range from 300-850. The higher your score, the better your credit. According to FICO, there are five factors that make up your credit score: payment history, amounts owed, length of credit history, credit mix, and new credit.
Each of these factors is worth a certain percentage of your credit score, the better your information in each section of your credit reports, the higher your credit score could be. For example, payment history is worth 35% of your credit score, so the more car loan payments you make on time and in full, the more your credit could improve. This doesn't just go for auto loans, the more bills you pay on time, the better off you are.
Getting a car loan can also help because it means adding an installment loan to your credit record, which bolsters your credit mix. This shows lenders how well you're balancing different types of credit such as auto loans and mortgages, which are both installment loans, and credit cards and lines of store credit which are considered revolving credit.
Looking for a Reliable Vehicle at an Affordable Price
When you look for a car loan with poor credit, it's a good idea to get an affordable, reliable vehicle – it's not usually the time to finance your dream car if you're struggling with credit issues. This doesn't mean you're stuck only financing a high-mileage beater, but you may get a better deal on an auto loan if you look for a used vehicle.
Cars tend to last longer these days, in part thanks to technology. This means that even a used vehicle could have the safety and technology features you're looking for in a car. Depending on your credit situation and what you need out of a vehicle, you may even be able to finance an affordable new car, in some cases.
Generally, subprime lenders have a minimum requirements for financing which include:
- A minimum auto loan amount of $5,000.
- Only financing vehicles that are under 10 years old.
- Only financing cars that have less than 100,000 miles on them.
If you're not sold on a used vehicle, but can't find a new car in your price range, a certified pre-owned (CPO) vehicle could be just what you need. A CPO car can be a good choice for an auto loan because they're typically newer vehicles, often just coming off lease. This gives you the luxury of financing a newer car, but skips the new vehicle price tag.
CPO cars also come with some form of manufacturer-backed warranty, and go through a rigorous inspection and refurbishment process before they can be sold. This peace of mind can make the price, which is slightly higher than a standard used vehicle, worth it.
No matter if you choose to buy new, used, or in between, you need to make sure that the cost of your auto loan doesn't break the bank. It's a good idea to know how much of a car payment can fit comfortably into your budget before you head to the dealership.
To do this, you should find your debt to income ratio and payment to income ratio. These formulas are used by lenders to calculate how much of your pre-tax monthly income is available, and how much of that income is going to be used by your car loan and auto insurance.
Look for Decent Interest Rates and Loan Terms
Interest is the cost of borrowing money. Different people qualify for different rates, but your credit score typically determines how much you're charged in interest.
Getting the best interest rate you can on an auto loan isn't about finding a 0% financing deal if you have bad credit. When you're struggling with poor credit, interest rates on car loans become about getting the lowest interest rate for your situation, not the lowest interest rate period.
Bad credit borrowers typically qualify for higher interest rates, but you still want the best deal you can get. It's important to know where your credit stands, so you can research what the average interest rates are for people in similar situations.
If you don't take this step you could be shooting yourself in the foot when it comes to financing. Some lenders may offer you interest rates that are sky-high when they see you have poor credit. However, if you don't do your research beforehand, you may never know you're getting a bad deal, which can cost you thousands of dollars in the long run.
Most auto loans these days are simple interest loans, which means that interest accrues daily based on the balance you owe. The longer it takes you to pay off your car loan, the more interest charges you rack up.
You can combat this by taking out a shorter term loan. Long loan terms are becoming more common, but if you have to stretch your loan out just to afford your monthly payment, you may not be able to actually afford the vehicle you're financing.
If you stretch your auto loan out too long, you run the risk of owing more on your loan than your car is worth, which means you have negative equity. Additionally, longer loans mean more time when something could happen to your vehicle. If your car breaks down in six years, but you took out an eight-year auto loan, you may still be paying on a vehicle you can no longer drive.
It's in your best interest to make the highest monthly payment you can comfortably afford for the shortest time possible. This allows you to balance your interest rates and loan terms, saving you the most money. To save even more money, you can borrow less by making a large down payment up front, or make extra payments on your loan whenever possible.
Remember, you don't have to take the first deal you find, and should never sign on the dotted line if you're uncomfortable with any of the terms in the contract.
Ready to Make a Move on Your Next Auto Loan?
Now that you know what to look for in an auto loan – credit building, affordable prices, a reasonable interest rate, and manageable loan terms – you can start your search. Or, instead of searching for a car loan alone, you could let us help.
At Auto Credit Express, we know where to go for the right kind of lenders to work with a number of challenging credit situations. We've built a network of special finance dealerships across the nation, and we want to get you connected to one near you. Make your move now by filling out our free auto loan request form, and we'll get to work for you!