Buying a car when you have bad credit isn’t impossible. You’ll have to work a bit harder to get approved for financing, but you can overcome that challenge. Here are a few steps to take before applying for a car loan with bad credit.
1. Check Your Credit Score
Obtain a free copy of your credit report from all three credit bureaus and look them over. Verify that all the information on it is correct, especially if you have negative marks such as late payments or delinquencies. You can improve your score if you can afford to wait a few months to buy a vehicle, which will get you better financing terms and more choices for a lender.
2. Reduce Your Debt
Credit scores take time to fix. One thing you can do to improve your score faster is to reduce your debt as much as you can before applying for an auto loan. Paying down credit cards decreases your credit utilization ratio which plays a large part in your score. Aim to keep it under 30% at all times.
3. Have a Decent Down Payment
Walking into the dealership with cash for a down payment works immensely in your favor. It could be the difference between getting approved or not. A larger down payment can potentially get you a lower interest rate and a shorter payment term, which means you’ll save on the overall cost.
4. Shop Around
Don’t limit yourself to a single lender when looking for a bad credit car loan. Compare terms and rates between at least three lenders in the same time frame. A hard inquiry from lenders can drop your score, so don’t let your shopping around take more than two weeks.
5. Know What You Can Afford
Lenders look at your credit score, but they also look at factors such as your income, house payment, and other debts and obligations. Lenders want reassurance that you can afford to pay the debt back, and if the monthly payment exceeds a certain percentage of your income, they won’t approve financing.
6. Get a Co-Signer
Try to go to the dealership with someone to help support you during negotiations. Ask someone you trust such as a really close friend or relative to co-sign for the loan if they have good credit. Remember that they’re taking a huge risk because if you default, they are responsible for the payments. You’ll likely get approved and obtain a lower interest rate by having someone else on the loan who has a solid payment history.
Purchasing a car with bad credit is possible if you’re willing to work for it. Prepare yourself ahead of time and improve your chances of getting approved. You’ll be glad you did when you drive your new car home.