Can I get Car Financing with a Bad Credit Score?

Introduction

Not all of us have great credit histories, some of us have been victims of economic downturns or inflation, and others have faced family trauma or health issues that have led to credit scores going down.

Whatever the circumstances, most of us require a car, whether as a necessity or as a luxury; thus, bad credit does not have to stand in our way.

According to Experian, the biggest credit bureau agency, Americans with bad credit had borrowed the same number of car loans as Americans with good credit in 2020.

This article discusses the steps to consider before applying for a car loan with bad credit and the institutions that can help.

Steps to get financing

Several steps can improve credit rating if you do not immediately plan to take a loan. Your credit score is the biggest determinant of the type and terms of the loan you will get accepted for.

Even though you will be able to secure an auto loan with bad credit, it will come with unfavorable loan terms like expensive interest rates. So the first step to avoiding losing thousands of dollars is to improve your credit.

1)    Check and Improve your Credit Score

A FICO credit score is a digit number from 300 to 850 that depicts your creditworthiness to the lenders.

Any score between 800-850 is considered top tier exceptional, a score between 740-799 is ranked as very good, between 670-739 is also good, from 580 to 669 is acceptable, but any score from 300-579 is poor or subprime and needs improvement.

A credit score comprises 5 elements, i.e. payment history, credit utilization, length of credit history, new credit, and credit mix.

  1. Payment history accounts for 35% of the total score, and it includes the complete record of all bill payments, credit card payments, loan payments, etc. As it constitutes a major portion of your score, you should make all payments within due dates.
  2. Then, credit utilization makes up a 30% portion of credit score, and it is determined by the analysis of the amount of credit available and the amount used by an individual. Mathematically, it is calculated by dividing the revolving credit by the total credit limit. When less amount is available and greater amounts are being spent, the credit utilization ratio is high, hurting the credit score.
  3. Next, the length of credit history makes up 15% of the credit score and it is the duration for which an account is kept open. The longer the credit history, the better it is.
  4. Credit mix contributes 10% to credit score and it is the variety of credit types like mortgage loans, car loans, credit cards, etc.
  5. Finally, new credit accounts for 10% also and it tells about the number of new accounts a person has created.
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To improve credit score, one should first be aware of it. You can obtain your credit reports for free once a year on AnnualCreditReports.com or any other credit referencing agency.

The credit report will show your standing and allow you to identify errors if any. Then you can work on the weak areas like due payments to improve your credit rating.

Loans granted on subprime credit scores are not much desirable. For instance, according to an Experian report 2020, a loan was granted to a subprime credit holder at an 11.33% interest rate while the average interest rate for good credit holders was 5.14%.

Also, the variety of car models and loan duration shrinks for low credit holders. Hence, even though you can get a loan with bad credit, building your credit to a good level is advisable before applying for a car loan.

2)    Check Income, Job, and Residence security.

It might happen that you wouldn’t be able to improve your credit score even after trying. Not to despair, because lending bodies also assess your income stability, employment, residence, and ability to effectively manage existing and upcoming expenditures after getting a loan.

Therefore, to increase your chances of getting approved for an auto loan, you should have sufficient resources or income to pay for existing debt and upcoming monthly car payments.

Checking your job security and settlement is also a method for reducing the lender’s risk. If you score well on these metrics, there is a high possibility of getting low-interest rates.

3)    Check affordability to pay Down Payment and Monthly Expenses.

Calculating how much down payment and monthly payments you can afford to pay is a critical step in choosing your car.

Down payment is like security against your loan because it is some portion of the total car payment you have paid, consequently leaving you with a lesser amount due.

If you manage to put down a good percentage like 20%, then the lender is definitely going to offer lesser interest rates, despite your bad credit.

Apart from the fixed car price, other expenditures like gas/fuel, maintenance, accessories, and monthly loan payment must not be overlooked while making a car purchase.

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All these expenditures must be pre-calculated before walking into a dealership. You must not get tempted to buy an expensive model that you can’t afford as it will damage your already weak credit score.

4)    Check with a lender for Preapproval.

Once you have evaluated yourself on all the above criteria, you should get pre-loan approval. Here the financier will look into all your finances and then offer you a loan.

The terms and agreements won’t be finalized yet but it will confiscate the uncertainty about getting a loan or not.

Also, you’ll get a preapproval letter making your position stronger in the eyes of lenders. Furthermore, the amount of loan offered would narrow down the models to choose from depending on your affordability range.

Then you can formally apply for financing without having any ambiguity about your financial position.

5)    Check with a Co-signer

A co-signer can be a friend or relative who has a good credit score and is willing to sign up for the loan with you.

It means that he/she agrees to take equal responsibility for paying loan payments. This is the best way of acquiring a loan at decent terms because the lender feels secure as you have provided someone more authentic to hold accountable if you might default.

6)   Institutions that can help

Now that you have taken all measures to become well-aware of your credit information, the next crucial step is to find the best suitable deal that meets your needs.

The market of auto-loan lenders is highly saturated with lenders who can trick you into making an unwise decision for their sales.

To prevent this, you must conduct extensive research on lending institutions. Some of these institutions are mentioned below.

Banks

The banks or credit unions where you have already opened accounts are more likely to grant you loans despite bad credit because of your customer relationship with them.

These lenders know you and your finances very well; thus, they trust you, find you credit-worthy, and offer discounts.

You can apply for a bank loan both online and on-site. Banks can also be a source of getting preapproval letters online by running a soft inquiry. But banks comparatively charge higher average interest rates.  

Online lenders

There are institutions, like banks and companies that operate completely online and offer various car financing options through their websites.

The advantage here is to finance from the comfort of your home and get free credit preapprovals from these lenders. 

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Manufacturer Financing

The car manufacturers like Toyota, Nissan, and Tesla offer financing opportunities. This makes car shopping a one-stop-shop, free preapprovals are also granted on their websites, and your credit information is not shared further. But, it reduces the options available as you have to buy from the particular manufacturer only.

Dealership Financing

Dealerships are the most common type of lenders that present you with diverse car options from many different manufacturers, so there are good chances of getting approved.

But your credit information is shared with other dealers and you are mostly required to visit the dealerships.

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These are special dealers that offer loans to people with subprime credit. But these should be your last option after getting disapproved from banks, manufacturers, and other dealers because these lenders offer very high-interest rates, so you end up paying the price much higher than the vehicle’s original price.

Conclusion:

We have seen the statement ‘no minimum credit requirement’ highlighted on many credit lending companies’ websites.

This gives us the short answer to the question, ‘YES’ you can get car financing with any credit, but financing is supposed to relieve financially stressed people.

However, financing with bad credit can cause you more damage than benefits.

You don’t have to worry about getting approved for any credit score because there are institutions specifically looking out for people like you because of the high interest they will charge.

Instead, you should focus on ways to improve your credit and explore credit lenders so that car financing can become a piece of cake for you.

Frequently asked questions

How bad does credit score impact financing?

A bad credit score leads to impairment of credibility in the eyes of lenders. It increases default risk. Hence, lenders increase interest costs.

How can I improve my credit score?

First of all, there is a need to check if the impairment of credit score is genuine or due to some error. If it’s due to some error, credit repair can be made.

However, if it’s due to some problems, you need to work on money management.

What is credit repair?

Credit repair is the process of repairing a credit score. For instance, there may be some errors in the credit report. So, there is a process to make corrections called credit repair.