Lenders look at a variety of factors when deciding how much auto financing you’re approved for. That said, your credit score is the most influential factor. When you go to buy a car you might find yourself in a tough spot if you have bad credit. You can take steps to improve your credit, but you can also get a car with bad credit. It just means that you have to know what you're doing.
Interest rates for high-risk people, or people with bad credit, are very high. This is because the lender is taking a chance on lending money to someone with a bad credit history. The high-interest rate is designed to get the lender paid even if the buyer doesn’t make timely payments. That, paired with a long loan term, can mean you spend a lot of money you don't need to. That said, sometimes you don't have much of a choice. This means you need to hunt for the best deal. Follow the advice listed below and you should not only be able to get a good car but also get a good bad credit car loan as well.
What Does a Bad Credit Auto Loan Look Like?
High-risk car loans can look dramatically different in terms of overall amount paid and monthly payment from a car loan to someone with good credit. Interest is an amazing thing, and it can be your friend or your worst enemy. In the case of people with poor credit scores, interest is usually a negative thing. According to Lending Tree, interest rates on car loans for people with scores under 500 can be anywhere from 13 to 20 percent, depending on a variety of factors.
This all translates to a much higher monthly payment and a higher cost for the car over the course of the loan period. To offset this, many people go with a longer loan period. While a three or four year loan period is usually advised, people with poor credit often have to settle for 72-month (six-year) or 84-month (five-year) loans. That’s a long time to be paying for a car. Also, due to the high-interest rate and the longer loan period, you’re going to pay a lot more than the car is actually worth.
What Should Bad Credit Car Shoppers Do to Get a Good Car?
The good news is that you can still get a good car with bad credit. Lenders are willing to work with you to get you in a car, but you shouldn’t jump at the first opportunity. You need to think strategically about your car shopping and look for the lender that’s willing to offer you the best deal. With that in mind, here are some car shopping tips for people with bad credit.
- Have a Budget and Stick to It
Before you shop for your car, you need to sit down and look at your finances and realistically determine how much you can spend on a car. Remember that there are always unexpected expenses, so try to keep a buffer in your finances and don’t spread yourself too thin. If you need to, seek financial advice from a qualified advisor. Having a professional help you manage your money can go a long way to ensuring that you make the right decisions.
- Work With the Specialized Lenders
Not every lender will work with someone who has bad credit. If your credit score isn’t great, you should look for lenders that specify in loans for people in your position. Find several to go to and compare offerings. Don’t let a lender talk you into a specific loan without shopping around. This will ensure that you get the best possible loan. Lending Tree notes that it can really help your case when shopping if you get a letter of pre-approval from a lender. This will tell dealers that you’re serious and that you’re not willing to settle for what’s usually more expensive dealer financing options.
- Go With the Shortest Loan Term and Lowest Interest Rate
When you’re looking at your options for a car loan, you want to go with the lowest possible interest rate and the shortest loan period. Make sure to do the math and determine how much you’ll be paying each month and how much you’ll pay over the course of the loan. By taking the time to crunch the numbers, you’ll be sure you made the best decision. By doing the math, you’ll also be able to differentiate which lending offer is better if they have similar terms and rates.
- Don’t Let the Dealer Sell You On Extras
Dealers love to sell customers on extra equipment, warranties, and special insurance deals. According to Lending Tree, these items can even be tied up into the loan and sale in some cases. This means the dealer won’t give you the car unless you agree to purchase them. While the add-ons might not seem so bad, they can really drive up the cost of the car. Also, the Center for Responsible Lending noted that most of these add-ons and extra equipment simply aren’t worth it. There are exceptions, but in general, it’s best to avoid these extras. If the dealer really wants to sell the car, they’ll do it without the extras. If you’re not getting the deal you want, you can always walk away from the sale.
What About Dealer Financing?
Many people with bad credit think they’re out of options. Then they see that the dealer offers financing options to people looking for a new car. The dealership financing deals usually aren’t very good. There are cases in which they make sense, but according to Bankrate, dealer financing is rarely a good deal.
Bankrate notes that dealer financing usually works like this: you meet with the dealer finance manager. He or she gets your relevant information and then emails or faxes it to various lenders who are willing to lend you money. From there he or she chooses the deal that will give the dealership the largest commission. Most dealers don’t have your best interest (no pun intended) at heart. They want to use you to make money.
Dealers usually make money off these lending deals by taking on a little extra to the interest rate. CarInfo.com noted that sometimes this is a one or two percent bump but it can be all the way up to six or eight percentage points. This is the fee they charge for being the middleman between you and the lending service.
There’s an argument to be made that the dealer should be paid for this service, but usually, the consumer gets gouged for something they could have easily done themselves. The moral of the story is that you should reach out to a variety of lenders before you ever go to the dealer. Try to strike up a good deal with a lender. Then, go to the dealership with that deal and see if they can beat it. If they can, then going with their financing isn’t a bad idea. They rarely will be able to beat it, though.