Guide to Getting Car Loans for People with Bad Credit
Auto loans are often the only way that an individual can afford a new car, as many people lack access to the funds they would need to pay for it outright.
However, auto loans for bad credit can have less than favorable terms. How do you know whether you’re getting the best deal on subprime auto loans?
Car loans with bad credit can be trickier to obtain than those designed for individuals with superior credit scores. Here at AdvisoryHQ, we’ve seen a lot of questions about how to get a car loan with bad credit. Our objective is to provide detailed answers to all of your questions about obtaining auto loans with bad credit. We will cover information such as:
- What interest rates should you expect on auto loans for bad credit?
- What terms are considered favorable on car loans for bad credit individuals?
- Where should you go first for bad credit auto financing?
- What is the best place to get a car loan with bad credit?
If you’ve had questions about car loans for people with bad credit, join us as we dive into the details of how to get a car loan with bad credit.
Image Source: Car Loans for People with Bad Credit
Understand Your Credit History
When is the last time you really took a detailed look at your credit history? If you have taken someone else’s word that your credit is less than stellar, it might be time to take a closer look for yourself. Before you begin applying for auto loans for bad credit, you need to examine your history to make sure you really fall into that category.
Each year, you are entitled to one free credit report from the major credit bureaus (available at www.annualcreditreport.com). This won’t list your credit score, which is what many financing companies and lenders take a look at before issuing any sort of prime or subprime auto loans. However, it does list all of your pertinent credit history for the year.
While it isn’t a common occurrence, there could be errors on your credit report. The Federal Trade Commission study indicates that approximately five percent of individuals fall into this category. This could range from black marks due to late payments to accounts still being marked as unpaid. Depending on what the issue is, you may be able to have it rectified on your credit report.
Reach out to the creditor first to determine if they will be able to address the issue quickly and easily. Alternatively, you may also choose to file a dispute with the credit bureau. By removing false black marks on your credit report, you may qualify for better loans instead of searching for car loans for bad credit individuals.
Rates on Auto Loans for Bad Credit
It’s no secret that finding car loans with bad credit typically means receiving higher rates. However, what can you really expect to pay for your vehicle when all is said and done? If you’ve been trying to figure out how to get a car loan with bad credit, one of the key pieces of information that you’ll need to weigh is what rate your lender is offering you.
Whether you choose to pursue auto loans online or through more traditional brick and mortar financial institutions, rates will often be the first number placed in front of you in regard to bad credit auto financing. Knowing what numbers you should anticipate when it comes to your interest rates can go a long way toward helping you find favorable terms on auto loans with bad credit.
Image Source: Capital One Auto Financing
If you have a few blemishes on your credit, many lenders that offer subprime auto loans will still be willing to take a chance on you. They make up for that risk-taking with a higher interest rate, leading to higher income for them over the length of your loan. Car loans for people with bad credit typically come with an average of a ten to thirteen percent interest rate, significantly higher than the four to five percent that can be expected for great credit.
In some areas, you can expect an even higher interest rate. Edmund’s found that auto loans for bad credit in certain states, such as California, typically came with higher interest rates: around eighteen percent.
Another piece of advice when it comes to weighing interest rates on car loans with bad credit would be to know your state’s maximum interest rate on car loans. Even bad credit auto financing has a cap on what lenders can charge when it comes to interest rates. Understanding where the maximum is will allow you to evaluate how much the lender is really trying to charge you in interest depending on how poor your credit is.
Tips on Terms for Car Loans with Bad Credit
Many people go into finding car loans for people with bad credit uncertain of what to look out for beyond interest rate. The terms behind your interest rate are just as important when it comes to auto loans for bad credit.
When you enter into conversations with various lenders, you should already be well aware of what you can afford to spend each month on a car payment. Many lenders will try to assess what your monthly payment could be and then craft car loans with bad credit around that number. For example, they may offer you a high interest rate spread out over a longer period of time to make your monthly payment fit more neatly into your budget.
Unfortunately, this doesn’t usually work out in your favor. You will end up paying more in interest over the course of the longer-term loan. When you search for auto loans for bad credit, you should be hunting for a loan that promises the lowest interest rate over the shortest period of time.
Experts say that if the only way you can afford to pay off the bad credit auto financing is by extending the term of the loan, then you should really reevaluate what you can afford. That’s usually a sign that your budget might not be able to accommodate the cost of the car. Keep in mind that in addition to your loan, you also need to factor in the monthly cost of repair and upkeep.
Read Before You Sign
You’ve finally found the perfect auto loan for bad credit. It has a low annual percentage rate, the term is only a few years long, and it fits neatly into your budget for a well-maintained vehicle. You’re ready to sign on the dotted loan for the car loans for bad credit individuals and drive off the lot into the sunset.
But did you read the contract all the way through?
It might seem like common sense to make sure that you read the terms of auto loans with bad credit through to completion before you sign and drive. However, it is especially important to make note of whether your financing deal is final or contingent. When your bad credit auto financing is final, that means that the lender cannot make any sudden or unexpected changes to your loan terms.
Contingent financing does not offer the same security. Car loans with bad credit can sometimes come with contingent financing where the lender may call you several days or weeks later to demand a higher down payment or to inform you that your interest rates have increased since the day you signed. Your monthly payments could end up significantly higher than you initially expected.
This is better known as a “yo-yo scam,” where you are offered favorable terms on the day you take the vehicle and subsequently end up paying a hefty price on car loans for people with bad credit. The Center for Responsible Lending estimates that individuals who fall victim to this type of scam generally end up paying around five percentage points higher than those who sign their subprime auto loans with final terms.
No Credit Car Loans
If you’re younger and simply haven’t built up any credit history, you may have just as hard of a time finding financing as you would finding auto loans with bad credit history following you around. You do have some options for no credit car loans though.
Your first choice would be to find a co-signer. If you need no-credit car loans, you may need to show that you have the support of someone else who has great credit. By agreeing to share in the responsibility of the payments on the vehicle, having a co-signer gives you a greater chance of qualifying for financing.
“Buy here, pay here” lots are also known for being more lenient on financing, offering auto loans with bad credit or no-credit car loans. Because they underwrite and process the loans themselves, they can be more flexible on the qualifications you need to have. The downside to this for you is that they are also usually significantly higher on their interest rates. They must make up for the extra risk that they assume as dealers and lenders when it comes to no-credit car loans.
Finally, you may have a better chance with both no-credit car loans and auto loans with bad credit if you decide to increase your down payment. Offering more cash upfront reduces the loan amount you’re requesting, shows an ability to save and afford a vehicle, and may encourage lenders to write you a loan, even if you have low or no credit at all.
Best Place to Get a Car Loan with Bad Credit
Now that you are well-versed in how to get a car loan with bad credit or no credit, it’s time to take a look at the best place to get a car loan with bad credit. You can find a number of auto loans online and through various banks, but where should you go first?
Bankrate recommends going to your personal bank or credit union first. They have more incentive to offer you auto loans with bad credit in order to retain your business as a whole. Not to mention, depending on your history with them, they may recognize you and your accounts. Building a good relationship with your personal financial institution might go a long way toward qualifying for auto loans with bad credit trailing behind you. This is often the best place to get a car loan with bad credit.
If your bank doesn’t offer car loans for bad credit individuals, then it’s time to take a look elsewhere. Here are a few ideas to help you find the best place to get a car loan with bad credit:
- Capital One: If you want to go with a well-known company, Capital One tends to offer competitive interest rates even on their car loans for people with bad credit. You can get preapproved for auto loans online, making it easier to know where you stand when you start shopping. They are also a little more flexible on financing with used cars than some lenders are.
- My Auto Loan: Obtaining car loans with bad credit through MyAutoLoan.com requires a minimum 475 FICO score and has the potential to pull several offers for bad credit auto financing for you all at the same time.
- Road Loans: Road Loans is owned by Santander Consumer USA, which is a large lender that specializes in auto loans with bad credit individuals. They are flexible on the qualifications needed to obtain car loans with bad credit, but be aware that they do rank on the bottom of the J.D. Power’s auto financing survey.
Image Source: My Auto Loan
These are just a few of the best places for car loans with bad credit. We could never hope to provide an exhaustive list of all the options, but these lenders should put you on the path to getting started. By taking a look around first, you will know what you qualify for and be better prepared when you head to the dealership.
Conclusion: Obtaining Car Loans for Bad Credit Individuals
Purchasing a new car with auto loans for bad credit doesn’t have to be incredibly difficult. In fact, there are a number of ways that you can make sure that you qualify and shop for the very best deal possible.
Weigh the options with several lenders to see who offers you the lowest annual percentage rate with the shortest term on their car loans with bad credit. Whenever you attempt to apply for auto loans for bad credit, you have approximately a 14-day window to apply with several lenders and shop various rates. Take advantage of this option by taking a closer look at several auto loans for bad credit to determine which one suits you the best.
Heading into conversations with dealerships and lenders armed with the knowledge of how to get a car loan with bad credit can make the difference between approval and driving home in your old car once again.
If you find that you have a difficult time obtaining car loans with bad credit, it might be time to spend a while working on building up your credit for the future. However, there are plenty of ways for you to find the best place to get a car loan with bad credit successfully.
AdvisoryHQ (AHQ) Disclaimer: Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info. Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.