If you have a low credit score, buying a car can be a challenge. Lenders decide your interest rate based on your credit score, and a low credit score will result in a higher interest rate. In some cases, your loan application can get denied due to your low credit score. However, while buying a car with bad credit can give you less negotiating power, you can still secure an auto loan with the proper preparation.
What Is Credit?
Credit is an agreement in which a borrower acquires something valuable and pays the lender back later. Most consumers don’t have enough cash on hand to pay for a house or a car upfront, so they use credit to purchase these larger items. For example, if you’re trying to purchase a car, you can take out an auto loan on credit and pay off your loan over time. Loans let you borrow money that you need to repay with interest.
Your personal credit score is a measurement of how likely you are to repay a loan in the eyes of the lender. If you have good credit, the lender will usually offer you a lower rate because they believe you can make the payments on time and fully repay the loan. The opposite is also true: if you have a low credit score, the lender will charge you a higher rate of interest as a form of protection in case you don’t make the payments on time or in full.
How Is Credit Score Calculated?
Your credit score is based on your credit reports. The most widely used credit scoring system in the U.S. is the FICO score, which ranks your credit score from 300 (low) to 850 (high). The higher your score, the more likely you are to get approved for your loan and charged a lower interest rate. You are entitled to three free credit reports per year from each of the major reporting agencies, but your information might vary slightly from agency to agency depending on the information they have. The FICO credit score uses the following five components to calculate your credit score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10)%
Tips for Buying a Car with Bad Credit
Improve Your Credit Score
If you have the option, it’s best to wait until your credit score improves before purchasing a vehicle. Even a few months can make a big difference to your credit score and help you save money on car insurance. A few things you can do to improve your credit score include:
- Pay off any unpaid debts.
- Continue to pay the minimum payments or more, as late payments can impact your credit score. Pay more than the minimum when you can.
- Review your credit report for errors and dispute them.
- Apply for new credit sparingly and avoid opening multiple new accounts.
- Keep unused credit card accounts open.
- Pay your bills every two weeks instead of once every month.
Make a Budget
One of the best ways to buy a car with bad credit is to decide on a realistic budget and stick to it throughout the entire process. Taking on a loan with monthly payments that are beyond your means can result in greater debt and credit damage. An auto loan calculator is a useful tool that can help you determine how much you can afford to spend on a new or used vehicle with your budget. You can also factor in registration fees, sales tax, interest, and more to help you get a clear picture of how much you’ll be spending. Since you’ll likely be paying more for interest with a bad credit score, make sure to factor interest into your budget. You might have to choose a less costly vehicle upfront to accommodate interest payments.
Make a Larger Down Payment
If you’re buying a vehicle with bad credit, you might get approval if you agree to make a larger down payment. A larger down payment lets you pay more towards the car upfront so that you’re borrowing less money and taking on less risk. Reducing the amount of money you’re asking for can help you get a loan, and your monthly payments will likely be less expensive with a larger down payment.
Get Preapproval for a Loan
Your bank, a credit union, or an online lender will likely offer you a better deal than your local dealership. Financial lenders will examine your expenses, your income, and your credit report before deciding how much to loan you. With this knowledge, you’ll know how much you can afford to spend on a car before you visit the dealership. You can get quotes from several different lenders and compare prices to ensure you’re getting the best deal. Make sure to secure a loan offer before you visit the car lot. Dealerships can charge you higher interest rates than you qualify for, and your dealership won’t have any incentive to negotiate your rate unless you have a counteroffer.
If you liked this article, check out more articles from The General for additional lifestyle and financial advice. Looking to purchase a vehicle? Make sure you’re fully covered before your first cruise. The General specializes in affordable auto insurance policies for every driving record and budget, and you can get a free quote in under two minutes today.