If you need car finance but you know your credit score is not as good as you would like it to be, it may seem impossible to get approved. This does not need to drive you to despair though.
All hope is not lost!
There are vehicle financing options available to you even though your credit score is not squeaky clean.
There are a few different options available to finance a car if you have a bad credit score. These financing options can get you back on the road and help to put you back in the driving seat of your finances.
The good news is that several lenders specialise in bad credit car loans. Unfortunately, this will result in higher interest rates because you are a higher risk to lenders.
Car loans for individuals with bad credit usually have a lower interest rate than personal loans for bad credit. This is because your car loan is still secured against your car which will result in a lower interest rate than a personal loan where the lender has no security.
While getting a car loan with bad credit is certainly not impossible, you might have to work a little harder to find a good deal. Here are some tips on what to do to improve your chances of obtaining financing and securing the best loan option.
Tips on getting your car loan approved:
- Have money available for a down payment. This will show a lender that you are serious and have saved money for the purchase of a vehicle. You should have saved 10% of the car’s value you intend to finance. If you have a down payment of 20% you can borrow less and may qualify for a lower interest rate.
- Get pre-approved. When you have bad credit, dealerships tend to offer high rates. If you have a pre-approved loan you have the upper hand over the dealer and can negotiate a better price.
- Get a copy of your credit report. A copy of your credit report is available for free. Ensure that there are no mistakes that are costing your points on your credit score, and fix any mistakes you notice with creditors.
- Provide a copy of your bank statement. Ensure that there are no returned debits as this will cast a bad light on your loan application. If you can show that you have been saving a little every month it will greatly improve your chances of finance. It does not need to be large amounts, even little savings every month will count in your favour.
- Compare. Some various online services and lenders specialise in bad credit financing for vehicles. By comparing different lenders, you can compare rates. Have a look at various sites and compare the options.
- Make sure to read the fine print. Some states have limits on car loan APR's. Some bad credit lenders try to bypass these limits by adding overpriced add-ons in the contract. Be sure to also check for early exit fees. If your situation improves you may want to settle the loan before the term ends. Some lenders may penalize you for that and still expect you to pay the full interest amount for the loan term.
- Be honest. Because this is a bad credit loan, the lender you approach will look deeply into your online loan application. If they find any discrepancies, then they may view your application less favourably. Be completely honest and do not withhold any important information related to your creditworthiness.
- Get expert advice. If you are worried that you will not qualify for car financing, make an appointment for a credit counselling session. The counsellor can guide you through your options.
Secured car loans
Lenders that offer bad credit loans don't follow the same stringent lending criteria as mainstream banks and lenders. A secured car loan is a loan that is secured against the vehicle that is being financed.
If you default on your payments or cannot afford the repayment, the lender can claim the car as compensation. Since the risk to the lender is lower, this means lower interest rates for you.
Guarantor car loans
A guarantor car loan means the loan is secured by a third party. This could be a parent, close friend or relative. The guarantor guarantees to pay the loan on your behalf if you default on the loan.
Guarantor car loans are especially useful to students. Since they have not built up a credit rating yet they do not have a credit rating. This is referred to as no credit.
By having a guarantor co-sign for your car finance you can improve your credit score if you are diligent with payments. You are also more likely to get approval and interest rates may be lower than it would have been without a guarantor.
Paying attention to the following aspects can help you find a loan that suits your needs:
- Interest rate. You will be able to choose between fixed and variable rate car loans. The benefit of fixed-rate loans is that your repayments remain the same for the entire loan term. If you opt for a variable rate loan, your interest rate will be lower if there is a drop in the interest rates. On the flip side, rates may also increase.
- Loan amount. The loan amount will depend on the lender, the car you want to buy and your ability to repay the loan. Keep in mind that the longer the term of the loan is, the more interest you will pay throughout the loan.
- Regular income. It will be easier for you to secure a loan if you earn a regular income. There are niche bad credit lenders that offer loans for self-employed people but the interest rates are usually much higher. If you are permanently employed, you could also consider applying for a loan from the car dealership.
Most bad credit car loan lenders offer amounts up to $2000. Payment terms are from 3 months to 2 years. Interest rates typically start from 4.69%. There are also car loan brokers that specialize in bad credit loans. Some of these personal loans can be repaid over extended terms of up to 7 years.
Don't make multiple loan applications
When looking for car finance with a bad credit score, be sure not to apply to too many lenders. Multiple applications to various lenders will harm your credit record. Lenders have to ask your permission to do credit checks.
Make sure you will be able to afford the monthly repayment comfortably. Lending sites have loan calculators available which you can use to select the mount of the loan you require and choose the term of the loan.
That will show you the exact installment you will have to pay monthly. Make use of these to determine exactly how much you will be able to afford to pay towards car finance.
Refinance & get a better deal
Once you obtain car finance, ensure that you keep payments up to date for at least 12 months. This will assist in showing other lenders that you have improved your credit situation.
This can give you the option to obtain other finance at a better rate by refinancing your vehicle. By following simple, practical advice you can buy the vehicle you need and even improve your credit score.