Getting Back on the Road: Auto Loans for Bad Credit Explained
Reliable transportation is necessary– whether commuting to work, running errands, or enjoying the freedom of the open road.
A dependable car can make all the difference. However, for many individuals with less-than-stellar credit histories, obtaining an auto loan can seem daunting, if not impossible.
But here’s the good news: Bad credit is not a roadblock to securing an auto loan. It can even begin a journey toward financial recovery and a brighter credit future.
The comprehensive guide below sheds light on the often misunderstood world of auto loans for bad credit, showing you that it can be a smart financial move with the proper knowledge and approach.
What Constitutes Bad Credit?
If you are reading this, you probably know what bad credit means. Put, you get bad credit when you fail to pay bills on time. People with bad credit have credit scores of below or under 600.
Common Reasons for Bad Credit
Some people with bad credit do not realize how they got there in the first place. If you are wondering how you ended up with a poor credit history, here are possible reasons:
Late payments
Your late payment history can account for 35% of your credit score. So, when you delay making payments, the creditor may have to report the information to the credit bureaus.
Consistent delays and missed payments can eventually lead to a poor credit score, making it challenging to secure car loans.
Declaring bankruptcy or foreclosure
Declaring bankruptcy or going through foreclosures significantly affects your credit history. Bankruptcy is a solution for many because it provides legal protection. However, it substantially affects your ability to access car loans or other assistance.
Filing for bankruptcy can remain on a credit report for seven to ten years. And because of the complications of bankruptcy cases, lenders avoid borrowers with a history of bankruptcies and foreclosures.
The same applies if you use an Individual Voluntary Arrangement (IVA). It is a repayment agreement that announces your inability to pay back a borrowed amount. It affects your credit score, making it difficult to secure car loans.
Choosing the wrong credit card
Unfortunately, choosing the wrong credit card can be a slippery slope to a poor credit score. If you pick a credit card with interest rates, fees, and limits that you cannot keep up with, you may struggle with the payments. Therefore, choosing the best credit card for your situation is important.
Lack of a credit history
Surprisingly, if you have never borrowed a loan or do not have a credit card account, then it may lead to a poor credit score since there is nothing to show in the first place.
Identity theft
If you are, unfortunately, a target of identity theft, it may lead to a poor credit score. The thief may run up large bills, damaging your rating and baring you from an affordable car loan.
Collection accounts
Lenders have the option of using third parties to enforce the collection process. Many creditors hire or sell delinquent debt to debt collection agencies before or after charging off their accounts.
The information appears on the credit report when these accounts go into collections. So, it will be challenging for lenders to provide a car loan to such an individual.
Charge-offs
A charge-off is when an account becomes delinquent for so long that the creditor gives up on trying to make the borrower make the payments. So, the creditor leaves a black mark on the credit report.
A charge-off means the account holder can no longer make purchases with the account. When a charge-off occurs, the borrower still owes the charge-off balance, making the credit score drop.
The information goes to the credit bureau, which remains on record for about seven years.
Paying the minimum each month
it may seem more lucrative to pay only the minimum amount on your credit card monthly.
However, in the long run, it could damage your credit score. Paying more than the minimum could mean lower interest, improving your credit score.
Prioritizing collectors over current bills
Another significant reason you may have a bad credit score is that you prioritize the wrong payments. When a bill goes into collections, you may want to remove it immediately.
However, it could come at the cost of neglecting other bills. If you miss these payments, you could develop more defaulted accounts.
Applying for credit too often
Loans and credit cards are valuable tools for keeping up with expenses. But every time you apply for a credit card or loan, the lender will likely run a hard credit inquiry.
Every time a lender runs this check, the credit bureau takes note. If these inquiries increase over a short span, it lowers your credit score.
Administrative error
Occasionally, a bad credit score could be an administrative error where authorities recorded the wrong information. It is best to rectify the error as soon as possible, as it will affect your ability to obtain a car loan.
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What You Need To Know About Auto Loans For Bad Credit
Bad credit auto loans are just like other auto loans; the only difference is that their terms of qualification are different because they cater to people with less-than-perfect credit scores.
Most lenders see a low credit score as a higher risk of default and are hesitant to offer auto loans with favorable terms.
So, lenders often have to consider several factors to determine the terms. Among these factors are your credit score, current debt, income, and the vehicle’s make, model, age, and condition.
Here, below, are some benefits of bad credit auto loans.
The Pros of an Auto Loan for Bad Credit
You will have more options
Taking an auto loan with bad credit gives borrowers more car options than if they had to pay cash.
Auto loans with bad credit also give aspiring car owners more options than just traditional used car dealerships; they can also source vehicles from bad credit car dealerships with these loans.
It’s an opportunity to rebuild your credit
Repaying a loan responsibly is one of the best ways to rebuild credit. A bad credit auto loan is an opportunity to prove to the lender and future lenders that you are a responsible borrower who can make timely payments. It reflects well on the credit score.
Auto loans are often short-term
Taking out an auto loan for bad credit is a short-term investment. Therefore, you will not be under the car loan for the rest of your financial career– an ideal attainable goal.
You can trade in your old car
Some lenders allow borrowers to trade in their old car as a down payment for the loan. It is a popular choice for car buyers with bad credit because it helps you get rid of an old car and reduces the total auto loan cost.
The car is the capital
Lastly, one of the best reasons to take out a bad credit auto loan is the vehicle is an investment. It is tangible capital that can help you earn more money, enough to pay off the loan.
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Common Misconceptions About Bad Credit Auto Loans
There are many misconceptions about obtaining a bad credit auto loan that can deter you from acquiring the vehicle of your dreams. The following are popular bad credit car loan misconceptions that should help you be confident in getting a loan:
You can only buy a used car
It is easy to imagine that the only car purchase you can make with bad credit will be for a used car. However, the best car loans for bad credit allow you to purchase new and used vehicles. As you will find out below, buying a new car in such a situation is more beneficial.
You will pay unreasonably high interest
Another common myth about bad credit auto financing is that you will pay unreasonably high interest. While you can expect a higher-than-average interest rate, genuine auto lenders will respect the market rate for bad credit loans.
Once you get a car loan, it worsens your credit score
Contrary to what most people think, getting a bad credit auto loan does not mean it will worsen your score. Your credit should be fine if you keep up with the monthly loan payment plan. In fact, it may even improve in the long run.
You don’t need to put a down payment
Some lenders offer no down payment with bad credit car loans. However, the best car loans should encourage you to make a payment. Why? It reduces the loan amount you will have to pay later. In addition, it allows you to negotiate interest rates since the lender will see your commitment.
Bad credit auto loan lenders are scammers
Bad credit borrowers often worry that lenders willing to work with them are scammers. While it is true that some lenders are scammers, it does not mean that everyone is. There are legitimate auto financing companies that loan to people with bad credit. Researching is a good way to ensure you find the best companies.
You will have no vehicle choice with bad credit car loans
Finally, some people believe that a bad credit car loan means no choice of vehicle. It can translate to run-down and unreliable purchases. But this is not true, as legitimate companies give you the choice of vehicle. Some of the best companies offer new and used vehicles of every model and year.
Types of Auto Loans (for Bad Credit) Lenders
Different types of lenders offer bad credit auto loans. Lender requirements vary, so one may be more willing to work with you than another. Your options include:
Buy-Here-Pay-Here Dealerships
BHPH dealerships are independent institutions that offer their own financing options. These dealers are the best options for bad credit borrowers. The interest loans are often higher but worth it for a good vehicle and quick processing.
Traditional Auto Loans From Banks and Credit Unions
Some banks and credit unions offer auto financing to people with bad credit scores. Check their loan requirements first before applying for the loan.
It is important to note that going through a bank or credit union may take longer than going through a dealership.
Online Lenders
Borrowers can also apply for an auto loan online if they have bad credit. As the name suggests, the loans undergo processing remotely but follow a similar procedure as getting a car loan from a bank or credit union.
The primary benefit is that approval can come as early as one business day. Auto Credit Express is a popular online provider connecting you with multiple lenders.
Traditional New/Used Car dealerships
It is also possible to get car financing options for people with poor credit at traditional, brand-specific car dealerships, but such options are often hard to come by.
How to Improve Your Chances of Approval
If you have bad credit, taking proactive steps to enhance your chances of getting approved for an auto loan is essential. So consider the following practical strategies:
Check and Improve Your Credit Score
Get a copy of your credit report from one of the major credit bureaus, then scrutinize it for errors or discrepancies. Note any outstanding debts, late payments, and accounts in collections.
Try to address these issues, such as paying off small debts. If not, renegotiate with creditors for more favorable terms. Consider hiring a credit counselor to help develop a plan to improve your credit score.
Bad credit auto loan lenders have a minimum credit score determining whether you get the financing. So do not skip this step.
Review and Rework Your Budget
Lenders must gauge your ability to repay the loan. Therefore, you need to assess your current financial situation and develop a realistic budget based on your monthly income and expenses.
With the budget set, determine how much you can comfortably afford to allocate to monthly auto loan payments.
Save for a Down Payment
A down payment reduces the amount you need to borrow. But besides making it easier to repay bad credit car loans, it shows commitment. Save as much as possible, but the target should be at least a 10% down payment.
Reduce Your Debt-to-Income Ratio
Lenders often consider the debt-to-income (DTI) ratio when assessing loan applications. DTI weighs up monthly debt payments to monthly income.
You can shift favor to your side by ensuring the numbers are good. So, pay down debts to lower the DTI ratio and make yourself a more attractive borrower.
Research Multiple Lenders
Lenders have different criteria for granting bad credit car loans. In addition, some are more willing to work with people with bad credit. So, explore various lending options to find the one that works best.
It is best to start with lenders with whom you have a relationship, then try to find other favorable ones.
Consider a Co-Signer
If you still have trouble securing an auto loan, consider a co-signer. If possible, ask a trusted friend or close family member with a good score to co-sign the car loan. A co-signer can assure lenders, making getting a loan easier and improving terms.
Provide a Stable Employment History
Finally, it helps to demonstrate stable employment and income. It can strengthen your auto loan application since lenders prefer borrowers with a steady income source.
Be Honest About Your Income
It is important to include all sources of revenue, such as salary, bonuses, rental income, and any other regular income streams. Be transparent about your total monthly income with the lender.
List All Debts and Financial Obligations
Detail your financial commitments, such as credit card payments, student loans, and other outstanding debts. Lenders need a complete picture of your financial situation so they can assess your ability to repay the loan.
Provide Accurate Personal Information
Ensure that all the personal information you provide, such as your name, address, and contact details, is accurate and current. Inaccurate information can lead to delays or application rejection.
Comparing Bad Credit Auto Loans
The best way to compare auto loans for bad credit is by examining the primary costs, the estimated monthly payment, and the total charges throughout the loan term. Consider the following:
Fees
There are two main fees borrowers should come across: the origination fee and the documentation fee. The origination fee is what you pay to secure the car loan, while the documentation fee covers the lender’s costs for securing the auto loan.
Annual Percentage Rate
The annual percentage rate determines the total borrowing cost. Lenders set an APR based on your credit score, loan term, your income, and the auto loan amount.
Aim for a lower APR because it gives an affordable monthly payment.
Tips for Auto Loans for Bad Credit
Just because you have bad credit does not mean you can’t fall into a trap. Borrowers need to research, determine how much they can afford, and be sure they can keep up with the payments for as long as the auto loan lasts.
Determine all these before visiting the lender. Additionally, follow these tips:
Prepare For High-Interest Rates
The most desirable rates often go to borrowers with good credit scores. Therefore, be prepared for high interest rates and be willing to pay them since it is a good investment. Just research a few lenders to get the best one.
The Newer the Car, the Better
Surprisingly, getting an auto loan for a newer car is more affordable than an older car. Collateral value makes lenders more willing to offer low-interest rates for newer vehicles.
Similarly, the lower depreciation risk often translates to lower interest rates. So, find a late model, low mileage car and prepare to invest in it.
Get A Short-Term Car Loan
Bad credit auto loans usually have terms ranging from 24 to 48 months– few lenders offer 60 months or longer. A short-term loan results in higher monthly payments and a lower interest rate.
The faster you contribute to the loan, the less interest lenders are willing to give. So, if you can afford the monthly payment, take the shortest term possible.
Be prepared for additional fees
Besides the vehicle cost, review the associated costs such as processing fees, taxes, documentation charges, and registration fees. These fees should be part of your overall cost considerations.
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Keep records of the application
Always maintain copies or records of the application form and any communication with the lender. It can be useful for reference and documentation purposes.
Check for accuracy before submission
Double-check the information you’ve entered on the application before submitting it. Ensure that there are no typos, missing details, or inconsistencies. Such mistakes could make the process lengthier and inconvenient.
Protect your personal information
Ensure that you submit your application on a secure platform and that your personal information is protected. Avoid sharing sensitive information via unsecured channels or with unauthorized parties. When in doubt, visit the office with your documents.
Final Thoughts
Whether it’s the daily commute to work, running essential errands, or embarking on adventures, having a dependable vehicle can make all the difference.
And bad credit does not have to be a roadblock to your automotive dreams. In fact, it can be the start of a journey towards financial recovery and a brighter credit future.
When it comes to obtaining a car loan for bad credit, knowledge is your greatest ally. The process might have a few twists and turns, but it’s worth taking.
So, what’s your next move? If you’re ready to take the wheel and explore your options for auto loans with bad credit, consider working with the trusted team at Titan Auto Group.
Contact us today so we can guide you toward loan success.
