Buying a car with bad credit can make you feel like you're a hamster spinning in a wheel. You keep going in circles without really getting anywhere. You've likely tried going to the dealership only to be denied for an auto loan due to your low score. You've probably also heard you'd have better luck with a cosigner. While it's true that one can significantly improve your chances of loan approval, what if no one is willing to cosign for you? When going without a car isn't an option, you should take matters into your own hands to get the vehicle you desperately need while you work to improve your credit score. These 5 hacks are all actionable steps you can take right away to finance your car the right way, avoid a future cycle of debt, and start rebuilding your credit.
Hack #1: Become Familiar With Your Credit Report
This first step can be uncomfortable for those who have a low credit score, but when it comes to your credit, ignorance isn't bliss. Get out of your comfort zone, face your fears, and take a hard look at your credit report. This step isn't meant to make you kick yourself over your past financial mistakes. Instead, its purpose is to get you closer to your future vehicle. When you get to know your credit report like the back of your hand, you know where you stand and the credit range you fall into. In many cases, borrowers think their credit score falls into a lower range than it actually does and they are more likely to get taken advantage of with auto loan offers.
You're eligible for one free credit report per year from each credit reporting bureau. By looking over the report, you'll better understand what is impacting your score from categories such as payment history, credit utilization, credit inquiries, and credit mix. You'll also be able to check for errors on the report and appeal any errors that are dragging down your score.
Hack #2: Boost Your Credit Score Quickly
After you become familiar with your credit report, you'll be able to take action to quickly boost your score before applying for an auto loan. Even just a few points can sometimes tip you from the bad credit category into the fair credit category which can make a significant difference in your approval status and interest rate. There are two ways to move the needle quickly: appealing errors on your report and reducing your credit utilization.
Once you obtain your credit reports from the credit bureaus, check over them carefully to ensure that your score isn't getting dragged down by incorrect items. Some of the most common errors include late or missed payments that were paid on time and actions that happened a long time ago and should have been removed from your report. If you find an error, dispute it with the credit bureau by visiting their website and completing the dispute form.
The second quickest way to boost your score is to decrease your credit utilization. Credit utilization is a percentage of the available credit you use and it accounts for approximately 30% of your credit score. You can reduce your credit utilization by paying down your credit card balances and/or getting an increase to your credit limit.
Hack #3: Expand Your Lender Options
Most car shoppers with bad credit don't realize there are other avenues for auto financing outside of the dealership's F&I office or their bank. Alternative lender options include credit unions, online lenders and buy-here-pay-here dealerships. Researching these alternatives can mean the difference between loan approval and rejection and a reasonable interest rate or one that's outrageously high.
Credit unions are non-profit, account holder-owned entities that are more flexibility about lending to borrowers with bad credit. The drawback is that they require customers to have a membership so you'll have to find a local credit union that will accept you as a member and then open an account with them. The benefit is that you'll have a better chance to get approved for a car loan and you'll also likely get a better interest rate for the loan.
If you don't want to open a new account with a credit union or you don't have one nearby, you can go through an online lending company that specializes in bad credit auto financing. Buy-Here-Pay-Here (BHPH) dealerships can also provide a solution, but you should be aware of the risks of buying a vehicle this way. A BHPH car dealership both sells cars and finances them directly. Usually, a steady income is the only requirement to get approved, but the downside is that the interest rates will typically be higher. Many BHPH dealers will require customers to make payments in person, and just one missed payment can lead to instant repossession of the vehicle.
Hack #4: Get Pre-Approved for a Car Loan
After you explore all your lender options, it's time to start applying for auto loan pre-approval. Comparing interest rates on auto financing can benefit every car buyer regardless of credit score, but it's especially important for those with fair or bad credit. Having the ability to compare several car loan offers gives the car shopper the power to "shop around" for financing and select the lowest interest rate and the best loan terms.
So how does pre-approval work? After you apply at a bank, credit union or online lending company, the lender will pull a hard credit check. This puts a slight ding on your credit score, but shopping around for a good rate will still work to your advantage and your score should bounce back quickly. Time is of the essence here. If your credit score is pulled multiple times within a short timeframe, it will only count as one hard inquiry.
If you're approved, the lender will present you with a loan amount, interest rate and loan terms. Those with a bad credit score will typically be offered a higher interest rate than those with good credit, but at the very least, pre-approval will provide an idea of what to expect and which car will be realistic to buy.
Hack #5: Save Up for a Down Payment or Pay Cash
Saving up for a substantial down payment will not only make your monthly car payments more reasonable, but it can also improve your chances of getting approved for an auto loan and lower your interest rate. This can save you hundreds or even thousands of dollars over the course of your car loan. For a new car, a 20% down payment is recommended and for a used car, the down payment should be at least 10%.
To avoid falling into a cycle of debt that can land you with an even lower credit score than you started with, it's a good idea to keep your monthly car payments as low as possible. Going with an affordable used car and putting a substantial amount down or even saving up and paying for the entire vehicle in cash will help you avoid the stress of high monthly payments and potential repossession.