Automotive: Financing a Car with Bad Credit

A reliable car is a difference between succeeding in your goals and struggling under the poverty line. When we’ve had a financial setback affecting our credit, it can feel like digging ourselves out of the hole is impossible. Luckily for those who’ve dealt with this struggle, it’s far from a hopeless challenge. It is possible to rebuild your financial stability and find a bad credit car loan to start that process.

What is bad credit, and how does it affect your ability to get a car loan?

Credit, as used in the US, is the calculated ability for you to pay back a loan or financial obligation and the risk associated with a long-term payment plan on an asset. When your credit is damaged, investments made on your behalf, such as a car loan, are deemed as having a higher risk than those with good credit scores.

Your credit score will likely affect your interest rates, payment costs, and loan terms. If your credit is too damaged, you may find it nearly impossible to obtain a car loan without a substantial down payment or other collateral.

How do you get a car loan if you have bad credit?

There are a few options for getting a car loan when your credit is less than ideal. First, go into any negotiations for a loan with all the information you can get. You can request a full credit report from any of the three major credit reporting agencies up to three times a year.

When you are armed with more information, you have tools that you can negotiate. Talking to different agencies that offer loans will help you find the best option for you, your family, and your budget.

What are your options for financing a car if you have bad credit?

Specialty lenders that focus on helping those with low credit scores secure car loans are particular and defined by the kind of clients they serve. These companies intend to extract a high-interest rate from their clients to secure a high-risk loan and build their clients.

You can also find lending programs through your local bank to help you secure a loan even with less than perfect credit. You’ll need to discuss these options with your financial institution to get the specific details for each option. Many banks even offer credit builder loans which will help you save money and build your credit score to make securing a loan more manageable than ever.

Is there anything you can do to improve your credit score and make it easier to get a car loan in the future?

You can pursue several actions to boost your credit, from disputing false or out-of-date collections to working with your bank to repair your payment history.

You can request a credit report from any of the three major credit reporting agencies once per year. This is a great starting point for reclaiming your financial stability. Along with a few other steps, you’ll be on your way to bettering your credit in no time.

Work on your payment history.

One of your credit report’s most significant derogatory marks will be missed payments and defaulted loans. Ensure you’re doing your absolute best to make all of your payments on time, not just those reporting to the credit bureaus.

Pay down outstanding debts.

Dave Ramsey’s Snowball Method has helped thousands of people climb out of debt by regularly paying on every debtor account. Once you pay a one-off, the smallest, but the payment amount toward the next most significant bill to pay it off faster, eventually, you’ll be making a massive payment on your most considerable debt until it’s paid off.

This is just one of many options for debt repayment plans. Many collection agencies will even reduce the final cost with a payment settlement. It’s common for families in debt to use their tax returns to pay off more enormous debts and chip away at that snowball.

Bring something to the table.

Some lenders will accept collateral instead when you’re looking to get a loan but don’t have the credit to offset your risk level. This will be the temporary possession of a lien against your home, 2nd car, or other valuable and tangible property. If you can’t fulfill your obligation to pay your loan off, the company will take full ownership of your collateral.

If you don’t want to risk your priceless baseball card collection or the deed to your family home, you can choose to bring a substantial down payment. With more significant cash down payment when you apply for the loan, you’ll have to take out a smaller loan overall.

Bring a friend.

Suppose you’re unable to get financing on your own. In that case, you should start to consider working with a co-signer, whether your best friend or your parents; partnering with someone with solid credit can help you build your credit too. They use your friend’s credit level to balance out the risk.

Be sure that you don’t fail because not only will default in credit result in a hit on your credit, but it could also ruin your friend’s credit. You wouldn’t want to break that trust, and they wouldn’t want to help you again if you did.

Work with a credit restoration company.

You may need to do some work before qualifying for any loan, including a co-signed loan. In that case, you may want to schedule a consultation with a credit restoration company and work with their specialists to negotiate down debts and build a plan for saving money for a down payment.

Additionally, they may be able to help you find a privately sold car while you’re working on your credit and later use that car for the trade-in credit at a dealership. While you’re not driving the vehicle of your dreams yet, you’re on your way to meeting that goal and setting yourself up for future financial security.

What are the risks associated with financing a car with bad credit?

As mentioned, the worse your credit score, the higher your payments, and interest on a loan. Unfortunately, your credit is tanked most of the time because you took on a loan or other financial that your budget couldn’t sustain with your current income. And now you’re taking on a loan or financial obligation that may be higher than before because of your past mistakes.

Additionally, suppose you cannot fulfill your obligation and pay your debt around a car loan. In that case, you can have the car impounded, sell your auto loan to creditors, who may charge new fees, and crash your credit score.

Suppose you miss the payments on your obligations when you have a co-signer. In that case, you can drag their scores down with your credit or cause financial ruin by losing your collateral.

If you’re willing to sign the dotted line on a car loan with bad credit, you have to be absolutely sure that you can keep up with the car payments and maintain auto insurance on your wheels. Otherwise, you could find yourself in a worse place than before.

How can you ensure you get the best deal on a car loan, even if you have bad credit?

Once you’ve committed to getting a loan and purchasing a car, you can ensure you get the best rates by doing all you can to turn your credit toward the positive.

Shop around for the best rates
Research the car you want to purchase and consider the additional costs of car ownership. It’s more than just a payment.
Keep up on your payments.
Pay it off early if you are able.
Consider leasing instead of buying, or choose to buy a slightly older model than your sights set on.

Creative Planning and Commitment to Your Financial Future

Buying a car is a considerable investment, but it may be the best option for rebuilding your credit so you can make longer-term investments, such as buying a home. It is possible to secure a car loan, even with bad credit. However, it will take a lot of work and creative out-of-the-box thinking.

Never give up on your dream car just because you’ve had a previous financial setback. Build a plan, stick to it, and you’ll be cruising down the open road sooner than you think.