When you have poor credit, it may feel like getting any loan is out of your reach.
But, no matter what your credit looks like, you need a way to get to work and to all the other places that life takes you. And the good news is, it’s possible to apply – and be approved for – an auto loan, even if you have less-than-stellar credit.
If you’re in the market for a new car and are wondering how your credit will impact your ability to get financing, it’s time to find out how and where to get an auto loan. Start preparing for what you need to know about auto loans for poor credit now.
How Your Credit Score Affects Auto Loans
When you have a low credit score, you may be unable to qualify for loans like mortgages. Fortunately, for auto loans, you can typically get financing even with a lower score, the reason being that your creditors have a very tangible and accessible piece of property to reclaim should you default.
However, as with most types of lenders, a higher score will get you the most preferential rates and terms. Lenders typically offer the best deals to applicants with scores over 750; keep in mind that these rates are often what you see in advertisements. Once your score is under 650, you’ll likely be on the hook for higher interest rates.
Where To Look For An Auto Loan
Don’t assume that your credit score is going to prevent you from getting a loan with a prominent lender; one of the worst things you can do is find and commit to a subprime auto lender who will end up taking advantage of your lower score. In fact, perhaps the most important thing to remember when you get an auto loan is to shop around – as much as possible.
If you have excellent credit, you can typically apply for a loan right at the dealership, who in a sense acts as a broker for different auto lenders. If you have poor credit, instead, first complete an application with online lenders. Once you’ve filled out the form, they’ll let you know what interest rate you qualify for and how much you can borrow for a car. This will give you a guideline for your car search, but will also help support your case when you are at a dealership, as you already have a rate proposed.
It’s also advisable to check with your local banks or credit unions as these lenders will often offer the best rates on auto loans. You’ll see what rate you qualify for, and then will have yet another basis of comparison with online lenders and the dealership.
Ultimately, you may be able to obtain your loan from the dealership by getting these other approval numbers. You have proof that people are willing to give you a loan, so the dealer can choose to offer you an even better rate if they want your business.
How To Protect Yourself When Getting An Auto Loan
If you shop around as much as possible, you can at least rest easy that you’ve gotten the best rate and terms available. But are you missing some essential techniques that may help improve your auto loan terms even more? Don’t hide behind your credit score, and make sure you have a voice when it comes to your loan.
Don’t Fear Negotiation
When you have a low credit score, lenders may take advantage of this by not offering the lowest rates off the bat. They know you need a form of transportation, and you’re probably just happy that someone will help you finance it.
That’s why it’s crucial that you take control and ask for lower rates and better terms. The worst that happens is that they say no, the best that happens is that they say yes.
Look For Shorter Terms
You know that because of poor credit you’ll be paying higher interest rates, but you can minimize the total interest you pay with a shorter loan term. You’ll have higher monthly payments, but will pay less interest overall, meaning you’re not spending more than the car actually costs in the long run.
Put More Money Down
As with any loan, if you can increase the amount of your down payment, you’ll get better terms from the lender. Cars depreciate rapidly, so the amount you may owe five years into an auto loan could be more than the car is even worth. Instead, the more money you can put down up front, the more of a guarantee that you won’t find yourself in a bind in the future.
Pay Extras In Cash
There are various fees involved with buying a car, from registration to warranties to taxes. You may have the option of bundling these amounts into your total financing, but then you’ll also be paying interest on them for the foreseeable future. Instead, pay as many of these charges out-of-pocket as a one-time cost, so you maintain a sustainable balance between what your car is worth and what you owe.
Make Sure Everything Is Set Before You Drive Off The Lot
You don’t want to leave a dealer in your new car with your financing in a “contingent” or “conditional” status – the Federal Trade Commission (FTC) refers to this activity as “yo-yo scams.” Unfortunately, unscrupulous dealers use this technique to saddle you with a higher rate than the one you agreed to or to increase your monthly payments once the car is in your possession.
If you know you’ll be applying for an auto loan in the future, start taking steps to improve your credit with The Credit People. Get helpful tips delivered right to your inbox and sign up for our newsletter now!