While bad credit won’t stop you from being able to buy a car, it can make the decision to do so much tougher. After all, in the first quarter of this year, Experian announced record highs for the average auto loan amount ($30,032), average monthly payment ($503) and average loan term (68 months). These figures represent an especially daunting obligation for someone who’s already had credit issues.
And, in some cases they represent a classic chicken and egg scenario. Many consumers need more money to improve their credit, and in order to earn more money they need a job (and that job requires a vehicle). In addition, one of the best ways to build credit is to enter into a credit situation like a car loan and repay it properly. But that doesn’t mean you should settle for an astronomical APR. As you can see, there’s a lot to consider. When making the decision to buy a car with bad credit, use these six tactics to help make the car-buying experience a little smoother.
1. Pay Cash or Provide a Large Down Payment
An iron-clad method of buying a car with bad credit is to literally buy one—with cash. That can be easier said than done, of course, but it may be manageable if you put pre-owned vehicles on your shopping list. Paying for a car now also could help keep you out of credit trouble in the future, since you’re not adding a monthly payment to your budget. That said, many experts do recommend putting money away for maintenance and repairs with older vehicles.
If you can’t afford to pay outright for a new car—or a used one, for that matter—put up as much cash as possible up front. Lowering your loan amount lowers the risk to the lender, upping your chances for a good deal. Just be sure to leave money aside for emergencies, too.
2. Make Your Bad Credit Better
If you’re serious about needing an auto loan, you should get serious about repairing your credit first. While it’s certainly true that many past errors can stay on your credit history for years, there are some ways to boost your scores relatively quickly, and every extra point matters when you’re applying for a loan. Here are some steps you can take to improve your credit score, even if you have other outstanding debt.
One important factor in your credit score is how close you currently are to your credit card limits. As a result, if you can pay off or significantly reduce your outstanding balances, it could be reflected in an improved credit score in the very next report cycle. Another alternative is a debt-consolidation loan, which essentially bundles debt from different credit cards into one monthly payment. That kind of close-ended installment debt isn’t nearly the drag on your credit score that traditional, revolving credit card debt is, though it may require good credit to qualify.
3. Check the Work of the People Checking Your Credit
Making a mistake with your credit is easy enough to do on your own, so the last thing you need is someone else’s errors popping up on your credit report. Well before you start car shopping, you should go over all of your information from all three of the major credit reporting sources—Equifax, Experian and TransUnion—and verify that everything there is accurate. AnnualCreditReport.com provides free copies of all three reports once per year for consumers. Even if you have to pay, the minor expense can be worth it to correct and improve your credit score.
Moreover, knowing your credit score in advance can help guard against unscrupulous lenders, who may try to get you into a more expensive loan by claiming your numbers are worse than they really are.
4. Consider a Car Dealership Carefully
If you do need a car loan, you’ll eventually have to put your credit reports on the table. Yet different dealerships can look at the same scores and offer very different terms. Shop around to get pre-approved for the best ones before you begin looking at cars. It pays to be on guard against getting in over your head: The real challenge when buying a car with bad credit isn’t necessarily getting a loan; it’s getting a loan without exorbitant interest rates or other restrictive conditions. This is why experts recommend sticking with established dealerships: Interest rates may be higher there, but as explained by CarGurus.com, going to one of those so-called “bad-credit specialists” can be worse, as they may “stick you into deals that are virtually designed to fail.”
5. Look for Alternative Lenders
That said, don’t limit your loan search to automobile dealerships. Start with your own bank or credit union, and note that the latter can be particularly loan-friendly in terms of both costs and a customer’s financial condition. One of the reasons for this credit union advantage—the fact that credit unions are nonprofit organizations—also shows the way to another possible source for car loans: Community Development Financial Institutions (CDFIs). Certified by the U.S. Department of Treasury, nonprofit CDFIs exist in every state to “provide financial services in low-income communities and to people who lack access to financing.”
Another loan source to investigate is peer-to-peer (P2P) lending. It’s a bit like crowd-sourcing a loan, as funds are provided by individual investors, who are matched with loan applicants via websites such as Lending Club, Peerform, Prosper and SoFi. Generally speaking, rates on P2P loans are lower than from more conventional lenders, yet there still are fees to take into account. And even with these companies, the rates are based on your credit score.
6. Lean on Family for Help
Finally, family members may be able to provide assistance, either financial or otherwise. In the case of a loan, all parties can at least keep any costs and interest payments within the family, instead of profiting banks or other lenders.
Some people may be tempted to ask a relative or friend to cosign a loan, too. This is no doubt a great advantage if you’re the one trying to buy the car with bad credit; if you’re the one being asked to sign, however, it’s not something most financial experts would advise.