Do you fear that bad or nonexistent credit might stop you from having access to an auto loan? It’s common for economic hardship to damage credit to the point where getting approved for a car loan might seem more difficult. Surprisingly, no matter your credit score, there may be ways to find financing for a new car. There is a large network of lenders and car dealers who are more willing to work with low- and bad- credit score borrowers. If all goes well and payments are made on time, it could help boost your credit profile.
As you probably expect, your credit score does play a vital role in getting an auto loan. Auto lenders who accept an applicant with a low or no credit score will typically charge a higher interest rate or have more costly loan terms in order to cover the risk of lending you money. However, this does not mean that there aren’t options available to you. Although they may be more expensive, these options may be better than receiving no auto financing at all.
Pay Bills on Time
Auto lenders may assume that you struggle to make responsible and timely payments if you have poor credit. When searching for an auto loan, it is essential to show lenders that you can pay your bills on time.
It may take time to demonstrate your ability to pay monthly bills, but that’s exactly what lenders need to see before they offer you a long-term loan.
Check Your Credit Score
Auto lenders who accept an applicant with a low or no credit score will typically charge a higher interest rate or have more costly loan terms in order to cover the risk of lending you money.
It’s crucial to check your credit score and credit history ahead of time and fix any errors or try to catch up on late payments to improve your score and lower the cost of your loan.
Your payment history makes up 35% of your credit score and is the most important factor. Other factors that make up your credit score include credit utilization (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Assess Your Income and Debt
Lenders will typically look at your monthly income against your monthly expenses to weigh your ability to repay a loan. They want to see that you can make the new monthly car payments in addition to your existing debt obligations.
Before you apply for a loan or go car shopping, total your monthly debt against how much income you receive to get a better idea of how much you really can afford to pay per month.
Ask Someone to Co-Sign
If you are worried about a rejection due to bad credit and lack of a down payment, you can add a co-signer to help secure the loan.
Bringing a friend or relative to a car dealership or bank to act as a co-signer is one of the most powerful tools you can have for getting a loan with bad credit and lowering the overall cost of the loan, such as a lower interest rate.
Apply with the Car Dealer
Most dealerships will gladly offer financing on-site in order to sell a car faster, but some are more reputable than others. Be sure to read the fine print because some dealers will bury fees and offer expensive loans, especially if you have bad credit.
Sometimes, the rate is lower at your existing financial institution while other times it may be lower at the dealer, depending on the added fees. It is critical to first shop around online and seek options with your own bank to make sure you get a good deal.