Consumers with bad credit can find themselves in a costly bind when it comes to buying a car. Interest rates associated with car loans for people with bad credit can often price the vehicle out of reach. Lenders charge higher interest rates on high-risk clients to cover potential losses if the buyer fails to keep up payments. But there are scrupulous banks, credit unions, and other lenders that specialize in offering car loans with bad credit. It's in knowing how to shop for loans and compare car financing options that can make for a successful experience for the credit-strapped consumer.
How Does Bad Credit Affect Your Car Buying Experience
Car seekers with a sub-prime credit score of 500 and below are handled differently than good-credit borrowers – they have much larger monthly payments. They can face an annual percentage rate on their loan from 13 percent to over 20 percent, depending on their credit history. It doesn't mean that a person with a poor score can't get a car loan; it's that they must take on a strategy that minimizes other potential behaviors by car dealers to lock them into poor choices in financing.
How to Shop for Car Loans with Bad Credit
It's likely that someone shopping for a car loan with bad credit will encounter less flexibility in the make, model, accessories and other add-ons that might be more affordable for those with good credit scores and credit histories. That means a bad-credit shopper must make plans and stick to them. Here are six key tips:
1. Check Your Credit
Credit reports examined by lenders are not always accurate or up to date. Check your credit score for free at My LendingTree and report all mistakes to each credit bureau. Hold off shopping until the score or report is corrected and updated. The vehicle lending world has its own rules. A subprime score that disqualifies borrowers from a home mortgage may still be acceptable to an auto lender.
2. Decide on the Right Car and Budget
It's time to set a budget. Use LendingTree's auto loan calculator to determine what you can afford to pay each month. With poor credit, a shopper may be limited to a class or make of vehicle in their price range. Finding a range of makes and model years can narrow down the choices to a workable selection of cars. Promise to stay within the price range, even when tantalized by a dealer's sales pitch. A last-minute, impulse buy can break the bank.
3. Consider Getting Pre-Approved
Work with lenders who specialize in car loans with bad credit. Lenders can offer pre-approval letters to qualified applicants, informing dealers about the amount shoppers intend to spend and nipping more costly dealer lending in the bud. Do not work with a dealer who will not work with a pre-approval in order to get you the best terms possible.
4. Pick the Shortest, Affordable Term
Many of the better bargains on car loans for people with bad credit are those with shorter pay-back periods. It's simple: the lowest annual percentage rate over the shortest period is the best bargain. Lenders frequently offer lower interest on three-year terms over five-year ones.
5. Recruit a Shopping Partner
Bring along a friend or family member who will not be emotionally involved in your decisions, and that can offer a second option on deals and offers without succumbing to dealer pressure. They can help you stay within your budget. The dealer may propose including the shopping partner as a co-signer if they have better credit. It's probably not the best idea in case you default on payments.
6. Beware of Add-ons
Dealers may dangle add-ons as contingencies to complete the loan and sale. These can include after-market products, insurance deals, or extended warranties. According to the Center for Responsible Lending, a great many add-on items "lack value and are overpriced". Don't accept anything that is contingent or conditional following the "sale". These so-called "yo-yo" scams can strap buyers with as much as 5 percent tacked on to their final interest rate.
After Taking Out a Car Loan with Bad Credit
Congratulations on getting the right car with the right loan. Now it's critical to follow up on the agreement to ensure that you keep the vehicle and at the same time improve your credit. Here are two critical points to consider:
Don't miss any car payments
Even one missed payment can tilt the balance against the consumer. That's because it won't be excused and will make the following car payment twice as costly. Three or four of these in a row can end up with repossession and an even worse credit score.
Work with lenders/dealers if in a bind
The sooner a borrower contacts the lender, the better are the prospects for a fair outcome. A lender may offer to change the due dates, modify the loan terms, or even refinance the loan. A loan extension can eliminate an immediate payment, moving the amount to the back end of the term.