Why America is so car-dependent has for a long time been a mystery. Over the last half a century, or so, Americans’ unexplainable “love affair” with cars has only grown deeper.
But cars don’t come cheap and many Americans borrow in order to buy cars. A recent study by Finder.com showed that nearly half of all American adults (44 percent) rely on auto loans for buying a car. According to a survey by Experian, the average loan amount for new cars rose to an all-time high of $ 31,455. That’s more than what the average American earns in a year.
Unfortunately, auto loan delinquency has also been on a steady rise. That means more Americans are buying cars with bad credit, and due to the high cost, they are digging deeper into financial woes.
But you don’t have to get sucked into that hole. We’ll help you to figure out how your credit score affects your auto loan prospects and give you a guide to help you land an affordable deal.
We’ll help you figure out how to buy a car affordably even with bad credit!
Understanding How Credit Scores Affects Your Auto Loan Prospects
When it comes to your credit performance, American auto loans are classified into five main tiers: deep sub-prime, sub-prime, non-prime, prime and super-prime. Super-prime and prime auto loans are offered to borrowers with excellent credit scores. On the other hand, if you are looking to buy a car with bad credit, you will likely fall into the deep sub-prime or sub-prime category.
Deep sub-prime and Sub-prime auto loans are high-cost facilities extended to individuals with bad credit. In other words, if you’re looking forward to buying a car with a credit score below 620, you’ll pay higher interest rates of between 11 percent to slightly over 14 percent.
That translates to an additional payment of between $ 49 and $97 as compared to your counterparts with good credit scores.
Why are Sub-prime Loans More Expensive?
Lenders basically price their products based on economics and risk. That is, they will first seek to make a profit from the loans and also factor in an element of risk in their pricing.
Borrowers with excellent and good credit scores pose a low risk of default. So, lenders will go out of their way to advance such loans at the lowest rates. Sometimes a few lenders will seek just to cover their costs and make a minimal profit in order to maintain a more profitable relationship.
However, if you have a bad credit score, you pose a higher risk of default. You probably have a low credit score because of some missed some of your payments or have a high debt-to-income ratio. Therefore, lenders are not confident of the payback. As such, they’ll seek to mitigate the impact of a default by charging higher interest rates.
So, how can you avoid the financial pit if you are looking to buy a car with bad credit?
Here’s a quick and comprehensive guide.
1. Check your Credit Report and Start Fixing it
Many borrowers just take the dealers’ word that they have bad credit and get sucked into high-cost auto loans. That shouldn’t be your case.
You can view your credit score through the online portal of your credit card issuer at no cost. If your score is terrible, you should first take steps to address the issues and turnaround from a low credit score in record time.
But first, you’ll need to access, read and understand your credit report, in order to know what issues lie therein.
Federal law gives you the right to get a free credit report from each of the three major credit bureaus once every year. All you need to do is just Log on to AnnualCreditReport.com and submit your request.
You can get more than one report in a year, but you’ll have to pay for the additional reports.
Fixing Your Credit
Fixing your credit is not a walk in the park, but, yet again it’s not rocket science. All you need is dedication, determination and drive. You can reach out to reputable credit repair companies and they can help you recover vital points, especially if you suspect erroneous reporting or if there are identity issues.
However, if the low score is all your making, it could take you some time to recover vital points.
Here are some tips on how you can grow your credit score in record time.
Avoid Additional Hits on Your Credit Score
Part of fixing your credit score is ensuring there are no new hits on your report. Therefore, it is essential that in the weeks leading up to your auto loan application, you’ll need to be a saint concerning credit issues.
Ensure that all your card payments are on time, avoid taking on new obligations such as increasing your credit card limit or new credit cards.
Other red flags for auto lenders would include late rent payments, lawsuits, and charge-offs.
2. Estimate Your Budget
Now that we are clear on credit score issues, you can turn to the car.
Before you settle on a new set of wheels or start shopping for dealers, be clear on how much you can afford to spend on buying the car and its upkeep. A recent report by CBS news indicated that more than seven million Americans had fallen behind on their auto loan payments.
Chances are, they didn’t budget or they planned wrongly.
Your budget also needs to be clear on how much you can afford to pay in the monthly installments and how much you can spend on other incidental expenses such as repairs.
As you budget, remember to factor in monthly installments for no more than 48 months if it’s a used car, or 60 months if it’s a new car.
3. Go Window Shopping For Dealers
Window shop for a suitable car and for the best dealer.
With regard to the car, rather than feasting your eyes on the latest models and flamboyant features, go for a well-maintained, and certified pre-owned car. You’ll save an enormous amount of cash by doing this. Moreover, you can also get a warranty for such a car.
Concerning the dealer, look for dealers with flexible terms and with a proven track record.
4. Window Shop for Auto Loans
A good idea would be to start with your credit union. Credit unions typically charge lower interest rates than banks, and many give preferential treatment to their members.
However, there’s a downside. Credit unions are also not-profit oriented. Which means, they have to be extra cautious not to issue too many high-risk loans. Therefore, your chances of buying a car with bad credit are slim. Nonetheless, you can use your long term relationship as an excellent bargaining chip.
Alternatively, you can check with non-profit agencies which provide auto loans for low-income buyers. However, it’s not a guarantee that you’ll find one in your state and you may not qualify under their strict criteria.
If none of these work out for you, check with your bank or other reputable, and approved commercial lenders such as BlueSky Auto Finance or Auto Credit Express. Online lenders are known for more flexible terms although they may be slightly more expensive.
5. Examine the Terms as well as Prices
Examine the different terms and interest rates. Remember, since your credit score is low, the interest rate will be higher than prime auto loans. Nonetheless, bad credit doesn’t always mean that you have to settle for exorbitant interest rates or oppressive terms. Therefore, watch out for lenders who would exceed double the average rate or with extreme terms.
Also, remain optimistic. Your understanding of bad credit may differ from the lender’s interpretation. So, keep your head up and, watch out for scams before buying into a deal.
6. Watch Out for Scams?
Unfortunately, sub-prime borrowers are often targets of scams and predatory lenders. These lenders often charge exaggerated interest rates and will pressure you to sign for longer terms or purchase unnecessary add-ons.
As you can guess, these loans often end up badly for the borrower and will further be tarnishing your credit record.
There are several sub-prime lenders online, but, you should particularly avoid “specialized sub-prime lenders” or “buy here, pay here” agencies.
Nonetheless, if you feel that these are your only options, reach out to reputable outlets and negotiate for the best terms which should include the option of refinancing.
After about 12 months of faithfully making your payments, seek to refinance the auto loan with a credit union or a different lender with better rates.
7. Get Pre-approved
Talk to the lender about your auto loan request and apply for pre-approval. With a pre-approved loan in hand, you are at a better position to shop for the car.
8. Reach out to Reputable Dealers and be Firm on Your Terms.
When negotiating with the dealer, resist enticements or being pressured into buying unnecessary add-ons such as extended warranties or loan insurance. Also, set your terms clearly with the dealer. For instance, you can insist on a background check of the vehicle using the VIN number and demand for an independent mechanic’s evaluation. This way, you’ll avoid purchasing a defective vehicle.
Tip: When negotiating with the dealer, turn the tables to your favor by starting up from wholesale value or dealer’s cost instead of haggling down from the asking price.
9. Make a Larger Down Payment or Trade-in with Your Current Car
Consider making a larger down payment, it will put you in better books with the lender, and can help you negotiate a better price with the dealer. It will also help to ease up with the monthly payments and put less pressure on yourself.
A trade-in with your current vehicle also serves the same purpose. However, you’d fetch a better value on your current car by selling it rather than trading it in. So look to put in a larger, down payment.
10. Read the Paperwork and Seal the Deal
Reading vehicle financing agreements is a tedious and boring task. However, this is your credit score, money, and car on the line, so, you’d better make the time and effort.
Make sure that you understand the paperwork, and confirm that they match what the dealer agreed to in your discussions. If you need to, ask a friend to tag along and help you to read and understand the lines.
When satisfied, seal the deal and sign on the documents. Remember to ensure registration with the DMV and that you meet all legal requirements.
11. Make Prompt Payments on Your Auto Loan
Now that you have an affordable auto loan and a new set of wheels, remember to keep your credit score up.
Skipped installments and late payments attract penalties and can trigger a revision of the interest rates. This will not just eat into your income and distort your monthly budget but it will also affect your credit score significantly.
Your repayment history accounts for more than 30 percent of your total credit score. Therefore, use this opportunity to build your score rather than break it.
Here’s the Bottom line
Getting an auto loan with a bad credit score is challenging. Moreover, even when you get an approval, the interest rate may push the facility out of your range and make the loan unaffordable. But, you don’t have to jeopardize your finances by settling for an exceedingly expensive car or auto loan.
You can take steps to improve your credit score, check with reputable lenders, plan for a larger down payment, and go for an affordable, but a sound vehicle. This will help you negotiate for a better deal even when buying a car with bad credit.