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Understanding bad credit auto loans

Not everyone has great credit. However, most people still need help to buy a car in the form of an auto loan. So what do you do if you have bad credit and need a car loan? Luckily, you can apply for bad credit auto loans and compare multiple offers using LendingTree. Here’s what you need to know.

A bad credit auto loan is simply a regular auto loan with some adjustments based on your credit. Usually, the major adjustment between a good credit auto loan and a bad credit auto loan is the interest rate. As your credit score decreases, lenders tend to charge a higher interest rate for auto loans. Credit scores are used as predictors of the likelihood of a person making their payments on time. Since lenders take a greater risk lending money to people with lower credit scores, it makes sense they charge more money to cover the risk of nonpayment.

How bad credit impacts your car-buying experience

Bad credit can have a big impact on your car-buying experience. While it’s very possible to get approved for a car loan even with poor credit, you will likely be saddled with a much higher APR and could end up paying significantly more for your car loan than someone with good credit and a lower APR.

The increased cost of paying a higher interest rate is not negligible. Let’s say you want to purchase a used 2017 vehicle valued at $21,000. Here are the interest rates you can expect to be offered, according to Experian, along with about how much interest you’d pay over the life of a 48-month loan.

Interest rates function punitively; as you can see in the table on the right, you will pay a high price for your auto loan with bad credit, in contrast with what you’d pay as an individual with an excellent score.

The best ways to lower your cost of borrowing: Improve your credit first, use a higher down payment or explore other options, such as getting a cosigner, which comes with its own pros and cons.

 Credit Score
Total interest paid over life of loan
Very Poor (300-500)
Poor (501-600)
Fair (601-660)
Good (661-780)
Excellent (781-850)

How do you find a bad credit auto loan?

You can get a bad credit auto loan just like you’d get any other auto loan. The first step is finding your credit score which you can do for free at My LendingTree‘. Once you know your credit score, you can start looking for auto loan programs that offer loans for people with your particular credit score.

In order to save both time and frustration looking for loans, you can fill out one simple application on LendingTree. LendingTree will then shop around with multiple lenders on your behalf and let you know if you’ve been approved. If you’re approved, LendingTree will let you know what offers you have available to you.
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Financing a new car vs. used car with bad credit

When purchasing a new car, you’re actually more likely to be offered lower rates than if you were looking to buy used. According to Experian, interest rates on new vehicle purchases can be as low as 13.98% for carbuyers with poor credit. That’s about five percentage points lower than if a person with poor credit were to purchase a used vehicle.

But don’t let the lower rates for new cars fool you.

While interest rates may be lower on a new car, it’s important to take all aspects of your financial picture into consideration. Because you have bad credit, you will almost assuredly be required to put money down or trade in your current vehicle before getting approved for a loan.  Also, new cars cost more than used cars, which means you might have to borrow much more than you’d planned.

So look at it this way: While your financing might be cheaper, you’ll be paying a lower interest rate on a more expensive item and wind up spending just as much, if not more, than you would have spent on a high-rate loan for a lower-cost used vehicle. Be sure to run the numbers to make sure you’re buying something affordable and getting a decent deal.

How to shop for the best bad credit auto loan

If you have bad credit, there are several things you will want to keep in mind as you’re shopping for the best loan available to someone in your situation.

Make a healthy down payment

Part of the formula that will be run when deciding whether or not you qualify for the loan will be your debt-to-income (DTI) ratio. The more debt you take on, the less likely it is that you will qualify for your auto loan.

If you can make a larger down payment, the amount of debt in your DTI will be lower, increasing your odds of approval. Another pro: Each dollar you pay upfront is a dollar you won’t have to pay interest on through financing.

Offer your current vehicle as a trade-in or sell it yourself

In lieu of a down payment, some dealerships will allow you to trade in your current vehicle. You’re not likely to get an amazing offer, but it will help your approval odds and lower the total amount you must borrow.

Of course, you may have better luck selling the car yourself in a private sale. Whatever you decide, be sure you handle the process wisely.

Start by looking up your vehicle’s value on sites like Kelley Blue Book or Edmunds. Get it appraised by a company like CarMax or at a local used car dealership that offers appraisals.

Get preapproved

Coming to a dealership with a preapproved offer of financing shows the seller that you’re serious and that you have access to capital. If you’re giving your business to a dealership, it also means your sales rep will be able to run your numbers by the dealer’s usual lending partners to see if there’s a more competitive loan out there.

LendingTree makes it easy to compare loan offers. Check out the LendingTree marketplace for auto loans. Fill out a short online form and you might get quotes from several auto lenders. It’s important to note that some lenders will do a hard pull on your credit.

Consider getting a cosigner

A cosigner can help you get a loan with better rates, or assist you with qualifying for a loan in the first place. Keep in mind that you need to be sure you can afford the loan. If you can’t, the cosigner’s credit is at stake, too, and the hit to both your credit report and his/hers could  damage your relationship.

What to do if you aren’t approved right away?

If you aren’t approved right away, you still have options to obtain financing for a new to you car. The first option is improving your credit. There are many ways to help increase your credit score including making all of your payments on time, reducing the amount of debt you owe relative to your credit limits, increasing the age of your credit history, avoid applying for new loans and diversifying the types of credit you use.

Of course, if you need a bad credit auto loan immediately, you can’t afford to wait. If that’s the case, LendingTree can often match you with a retail dealer that specializes in providing auto loans for people with bad credit.

Avoid these common car-buying mistakes

  1. Falling for scams
    Unfortunately, there are a lot of car-buying scams out there. One of the easiest ways to avoid them is to purchase directly from a reputable dealer. Private sellers may take your deposit and run. One common tactic is to ask a buyer to put money in an “escrow account”. Another scam involves something called VIN cloning, which results in “ownership” of a stolen vehicle.

    You should still be on the alert for these scams, but there are some shenanigans you should look out for at a dealership as a car buyer with bad credit.
  2. Falling for the bait and switch
    If you find a car online at a great price, be sure you’re getting the same offer at the dealership. Sometimes you’ll get a salesperson that promises you a price that’s literally too good to be true.

    What if he or she can’t get it approved by management, though? That salesperson is hoping you’re emotionally invested enough that you’ll purchase the car anyway — even if it’s outside what you can realistically afford.

    You may also show up to the dealership to find out that the vehicle has “already sold.” You had your heart set on purchasing your vehicle that day, though, so the salesperson is hoping you’ll be willing to take a look at more expensive options.
  3. Not understanding your warranty
    Sometimes a used vehicle will still have an active manufacturer warranty. If it does, the dealership will let you know about it. Before you take it at its word, make sure the vehicle hasn’t been through anything that would void that warranty. Typically this includes things like accidents, modifications or use as a business vehicle.

    Your dealership may also try to sell you an extended warranty. These aren’t necessarily scams, but make sure you know what will be covered, for how long, and how much the warranty will cost. That last bit is extremely important, as any additional costs are likely to be rolled into your financing, resulting in a higher monthly payment and more interest paid over the life of your loan.
  4. Not getting appraisal quotes for your trade-in
    Salespeople will often be interested in how much you want for your trade-in. When they heroically come back with the number you had been hoping for, it’s easy to miss the fact that while they’ve met your request, they’ve also raised the price of the vehicle you’ll be purchasing to make up the difference.

    To avoid this, it’s a good idea to get quotes for your trade-in from many dealerships, and to not discuss the exchange for your trade-in until you have a solid price on the new or new-to-you vehicle and are ready to seal the deal.
  5. Falling for the yo-yo financing trap
    Imagine you purchase a vehicle with financing at 17.62%. You’re pretty happy with that, as you know it could be worse with your credit score.

    A couple of days later, the used car dealer calls up to let you know the financing fell through. They say they’ve already sold your trade-in, so you’re going to have to finance with another lender. Luckily, they’ve got you covered. There’s just one catch: The new lender will only finance you at 22.75%.

    This is called yo-yo financing, and you can avoid it by bringing your own quote to the dealership. That way, even if the dealership does find you a better deal, you’re not stuck paying above-market rates out of panic if the dealership’s financing does indeed fall through.
  6. Focusing on monthly payments
    If a salesperson asks you how much you’d like to pay monthly, stop! Discuss only the overall price until you’ve finalized negotiations.

    Dealerships can often meet your desired monthly payment by extending the term of your loan. That means you will be paying high interest rates (thanks to bad credit) over a longer period of time.

    You might be saving more monthly, or be able to “afford” a vehicle that you thought was out of reach, but in all reality, you’re paying more over the long haul by taking a longer loan.

Ready to start your search?

You know market APRs. You’re aware of the hurdles you may have to jump as a car buyer with bad credit, and you know the scams to watch out for. Now that you’re armed with information, it’s time to get shopping.

Before you head to the dealership, be sure to get an independent quote of your own. Compare credible auto loan offers for those with bad credit with this easy tool.
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