What to expect when you need a new car but have bad credit

What to expect when you need a new car but have bad credit (or aren’t sure what your credit score is)

Think it’s impossible to get a car loan with bad credit? It’s certainly not impossible when you know what to expect and how to prepare for your trip to the dealership.

You just broke down on I-75. You know it’s time for a new car but you’ve had some rough patches in the past that have hurt your credit. Now what?

First, let’s define what low credit is. According to many lending institutions, anything under a score of 720 may be considered low credit. Even a few late payments from 4 years ago can negatively affect your score. Low credit scores can be a result of something as simple as filling out too many applications for credit cards to something as serious as having a car repossessed. Unfortunately your score can suffer from something you didn’t even do if you’re a victim of identity theft. Another innocent reason for a low credit score may be that you haven’t ever had loans and have no credit history, or you have always paid for everything in cash. Please don’t feel embarrassed or ashamed about a low credit score. It can be repaired and you do have options. Besides, having a score below 720 is much more common than you may realize.

What do you do if you don’t know what your credit score is? You can find out what your credit score is by requesting a copy of it (which you can obtain from any of the 3 major credit reporting agencies once per year for free), or you can monitor your score on a free website such as Credit Karma. It is important to note that the free credit monitoring services such as Credit Karma are notorious for being somewhat inaccurate. Realistically, your credit score will be several points lower on Equifax, Experian, and TransUnion than what Credit Karma shows. Knowing your credit score before you begin shopping for a car lets you know what to expect. Even if your score is less than 720, you still have many options and shouldn’t feel discouraged. Be aware though that lower credit scores mean you should be prepared to pay a higher interest rate on your loan. 

So you’ve checked your score and you’re below 720. Of course the bad news is your financing process might take longer because extra work will need to be done to ensure you get the best deal, and you’ll probably have to pay a higher interest rate. The good news is that the financing professionals at SVG Motors can help you navigate financing and help you find the best deals. Below we offer some tips to help you get ready to buy your new car, even with bruised credit.

Tip #1, know the terminology. Because someone with low or no credit represents a greater risk for the lending institution, they’ll pay higher rates. The term for someone with lower credit is “subprime buyer”. Generally, you can expect to pay a higher APR for your loan. APR is annual percentage rate and this number represents the amount of interest you’ll pay for the privilege of borrowing money.

Tip #2, be prepared. Expect to pay a higher monthly payment for a vehicle than someone who has a high credit score. This is because you’ll likely be paying a higher interest rate. However…if you can delay buying a car for a few months, do so and spend those months diligently paying your bills early or as a minimum, on time. Your credit history equals 35% of your total credit score, so late payments can really damage your score. A few months of on-time bill payment can bump up your score enough that it may make a difference in the interest rate you’re asked to pay.

Tip #3, bring your free credit report to the dealership with you. Showing your sales person or F&I manager what your score is can help them evaluate your situation before pulling your credit again. When a company runs a credit check on you, it can negatively affect your score; by having your credit score available ahead of time, you can avoid having unnecessary “hard pulls” on your report. (Hard pull is the term used when a company checks your credit to determine whether you’re a good candidate to lend money to). A dealership will still need to pull your credit when you decide on a vehicle, but if you shop at multiple dealerships, don’t let them pull your credit until you can work out a deal.

Tip #4, don’t be ashamed, and be forthcoming. Talk to your dealership rep about your score. Be honest about why your score is low. There are many fairly innocent reasons why a person may have a low score but can still be a good choice for financing. For example, if someone lost their job and didn’t find a new one right away, they may have gotten behind on their bills. This just means that a person hit a rough patch in their finances and doesn’t mean they’re a high risk for financing. Being honest with your dealership reps lets them know your intentions which they can often voice to the lenders. Many times if a dealership vouches for an individual, a lender will approve the loan. But it’s important to be honest about why your score is low.

Tip #5, if you can afford it, shorten the loan term. The quicker you pay off your loan, the less interest lenders typically charge. The APR for a 3 year loan can be a few points lower than for that of a 5 or 6 year loan.

Tip #6, believe it or not, despite having a lower sticker price, older vehicles can cost more – go newer to save. It might seem like an older vehicle will cost less, but the truth is older vehicles usually have higher interest rates than newer ones. Buying a new car with a low credit score might be a better option. Many auto manufacturers will even offer sub-prime deals.

Tip #7, Consider getting a cosigner. A cosigner can help you look like less of a risk to a lender, and therefore may help you get a better rate. There are many situations where having a co-signer can help you get an affordable rate and they include:

    • Your income is lower than the minimum requirement for an auto loan
    • You have bad credit
    • Your debt-to-income ratio is too high to qualify for a loan
    • You have a variable income

Keep in mind that your cosigner will be responsible for making your payments if you fail to. You are asking a huge favor from your co-signer so only consider this if you know without a doubt that you will be able to make your payments on time. Failing to do so will not only damage your credit but that of your co-signer, too.

Tip #8, do not shop at buy-here-pay-here lots. “Buy here pay here” dealerships usually charge more for cars than what they are worth. As if that isn’t bad enough, using this option doesn’t usually help your credit score since these lots rarely report to the credit reporting agencies such as Equifax. If you’re working hard to make all of your payments on time and in full every month, you should be rewarded for that with a higher credit score which typically won’t happen at a buy-here-pay-here lot.

Tip #9, be prepared to share a lot of information. Dealerships and lenders will want to know the following information. Have it with you when you come to shop to make the process go faster and more smoothly.

  • Your income
  • What type of loan you are trying to get
  • Your work history
  • How long you have worked at your current job

·         Whether you have no credit history or you have made some mistakes in the past.

·         The typical identifying information such as social security number, phone number, address, etc.

Tip #10, save up for a generous down payment. Lenders see those with a low credit score as a risk. They’re afraid they’re going to give you money, you’ll bail out, and they’ll be left with a vehicle they don’t want or one that is worth less than what the loan balance is. However, if you provide a generous down payment, the risk is substantially reduced; if you do quit making payments and the bank repossesses your car, your loan balance will be closer to, or less than what the car is worth (meaning the car has equity). 

Tip #11, once you have the loan, pay it off as quickly as possible. Pay more than the minimum payment, and pay it on time, every time. By doing so, you’ll reduce the number of overall payments you make, which often will reduce the total amount of interest you owe. Not all loans are configured to provide this savings though, so be sure to ask your lender if there will be a pre-payment penalty and also ask if paying extra each month will reduce the amount of interest you will pay over the life of the loan.  

Categories: Finance