We're big advocates of buying cars used. By forgoing the new car smell, you also skip the new car price tag, high depreciation, and throwing thousands of dollars out the window on a vehicle that you could have bought gently used. For car shoppers with bad credit, the benefits of buying used are even more apparent. Going with an affordable used car will make auto loan approval easier, reduce the down payment requirements, and set you on the right path to improved credit. 

Understand Your Credit

Checking credit score bad credit

When your credit falls in the subprime range, it's only natural to bury your head in the sand and forget it even exists. You'd rather not look at your credit score, interact with your credit score, even think about your credit score. However, even if you ignore your bad credit, auto lenders won't. A poor credit score that results from excessive debt, bankruptcy, repossession, or insufficient credit history is the biggest roadblock for financing a used car. Luckily, you can improve your shot at auto loan approval by understanding your credit and what lenders look for. 

The first step is to get a copy of your credit report and look it over for errors. You can get a free credit report every year from all three credit bureaus including Equifax, Experian, and TransUnion. Some credit card companies allow you to get your free credit score more often. Once you have the report, check it over for common errors like a late or missed payment that was paid on time and actions that happened a long ago and should have been removed from your report. If you find an error, dispute it on the website of the respective credit bureau as soon as possible.

Understanding how lenders make their approval decisions will also help you get the car you need. In addition to looking at your score, lenders dig deeper to gauge your credit utilization and debt-to-income ratio. Credit utilization looks at how much available credit is used, with the rule of thumb being to keep utilization under 30%. You can take action by paying down large credit card balances or getting an increase in your credit limit to improve your score. Making on-time payments and getting overdue accounts squared away will also boost your credit score and make approval easier. 

Research Auto Lenders 

bad credit car loan bank vs. credit union

Normally, car shoppers choose to finance their vehicles at the dealership's F&I office or go through their bank. When it comes to buying a used car with bad credit, however, not all lenders are created equal. Large banks offer the convenience of a nationwide footprint with physical locations and comprehensive lending services. On the flip side, these banks usually have higher fees and interest rates and are unlikely to approve car shoppers with deep subprime credit. 

Credit unions and online financing companies tend to be better options for car shoppers with compromised credit. Unlike banks, credit unions are non-profit entities that are typically owned by their account holders. This creates more flexibility and opens more doors for borrowers with bad credit to secure a loan. Credit unions also offer lower rates on auto loans than banks, so you'll have a better chance at keeping your APR rate within a reasonable range. 

Online auto lenders often cater to car shoppers with less-than-perfect credit. The drawback to this financing option is that there are no brick-and-mortar offices to go in and apply in person. However, the application process is typically quick and seamless, allowing you to shop around for the best auto loan.

Compare Interest Rates

calculating auto loan rates

Buying a car used reduces the purchase price and depreciation, but used cars also come with higher interest rates than new vehicles. This is because the condition of used cars is much less predictable than new, posing a greater risk to the lender. Getting pre-approved for auto financing from multiple sources helps used car shoppers with bad credit qualify for an auto loan before heading to the dealership. By getting several offers, you'll be able to choose the lowest interest rate which can save you thousands of dollars.

Select the Best Auto Loan Terms

Best auto loan terms bad credit

While the interest rate is a crucial piece of the auto loan offer, it's not the only factor to consider. The loan term and down payment requirements will all contribute to finalizing your monthly payment which should fit comfortably into your budget. Choose the shortest possible loan terms to reduce your interest rates and save money over the life of the loan. Saving up for the recommended down payment before heading to the dealership will also pay off. The bigger the down payment, the more likely the lender will approve your loan and the less you'll need to finance.

After you make the car purchase, you can set yourself up to further improve your credit score. Stay on top of making your car payments consistently and your credit score will steadily increase over time. This strategy is especially helpful for young car owners who have not built up much credit history or haven't had an installment account in their credit portfolio.

The three-step process of understanding your credit score, finding the right lender, and choosing the best interest rate and loan term will help you get behind the wheel of the used vehicle you need. It will also get you on the right path to a better credit score for the future.

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