How to Get an Auto Loan with Bad Credit
You need a car. In most major cities like New York City, it’s possible to live without a car. In many other locations, access to a car is an absolute necessity. A car can take you to the store, to and from work, to visit your Grandma (which you really should more often), and do a host of other things.
Yet, it’s rare to be able to buy a car outright, which means you’ll need an auto loan. Not a big deal if you budget your money and have enough income to cover it.
If you have bad credit, though, it becomes a whole lot harder. While it is possible, be sure to expect some extra hoops to jump through.
Table of Contents
- 1 Check Your Credit Score and Read Your Credit Report
- 2 Take Steps to Improve Your Credit
- 3 Try Getting Pre-Approval for an Auto Loan
- 4 Try Using a Cosigner
- 5 Set a Budget
- 6 Go to Multiple Dealers
- 7 Plan on Negotiating
- 8 Make a Plan to Pay off the Car Loan
Check Your Credit Score and Read Your Credit Report
Don’t just assume you have “good” or “bad” credit. Before you even set foot on the car lot, you need to know your actual credit situation. Credit scores can change pretty quickly, meaning if you had bad credit a year or two ago but have since been diligent, you might actually have an improved credit score.
You can start by first requesting your credit score through a soft inquiry. Checking your credit this way will not negatively impact your credit, and can be done as often as you want. You can do this through your bank or through an online service. If your credit score is below 580, you are considered as having “bad credit.”
Next, it’s important to understand why you have a bad credit score. You need to get your hands on your credit reports. If you haven’t gotten your credit reports in over a year, you can get them for free at annualcreditreport.com. If you aren’t eligible for a free one, you can purchase a new credit report directly from credit reporting agencies, or through third parties.
Reading your credit report can be tricky, but it can give you important insights to your credit situation. Your report has every credit and loan related action from the past seven to ten years, both good and bad.
Take Steps to Improve Your Credit
There is no magic wand to instantly fix your credit. If you made the mistakes and missed your payments on bills and credit cards, you’re stuck with the blemishes on your credit report.
If you want to improve your credit, you need to prove that you’re trustworthy. Make a plan to pay off overdue debts and bills, and then keep on top of future expenses. Prioritize paying all of your bills on time, and hold off on opening up new credit cards or taking on unneeded debts.
It is possible that some items on your credit report are not your fault, but they are negatively impacting your credit score. If you’re the victim of fraud or have had your identity stolen, there are probably errors on your credit report of things you never actually bought. There can also just be random mistakes on your credit report, including the same item being listed multiple times, incorrect information on the report, and even somebody else’s missed payments showing up on your credit report.
If any type of mistake is on your credit report that is negatively impacting your credit score, you can appeal it and get it removed. By getting more negative things off your credit report, your credit score will rise, possibly even getting you into a good credit score range.
Try Getting Pre-Approval for an Auto Loan
Pre-approval is simply going to a lender and asking, if you were to try and buy a car, how much money they would be willing to lend you, and at what terms. You can go to several different lenders to get multiple offers on loans to find what’s best for you.
Will Getting Pre-Approval for a Car Loan Affect My Credit?
No, getting pre-approved for a car loan won’t affect your credit. Similarly to when you request your credit score, pre-approval uses a soft inquiry to check your credit and isn’t recorded on your credit report. When you actually apply for the loan, that’s when you get a hard inquiry, and having too many of those can hurt your credit. You can get as many pre-approvals as you want without your score dropping a single point.
Shop Around for the Best Lender
There plenty of different places you can get a car loan, not just the dealership. Credit unions, local banks, nationwide banks, dealerships, car loan specialists, and more will all give you a pre-approval and advice on what to do. Just because you have bad credit doesn’t mean you have to go straight to sub-prime lenders. Hit up each lender that does car loans and see what they have to offer.
Finding the Best Loan Terms
Every loan offer you get is likely going to have slightly different elements to it. Some will have a lower principle, but higher interest. For others, the length of the loan will be longer, meaning paying less per month but more over time. Major parts to consider are: monthly payments, APR, and how long the loan is for.
Try Using a Cosigner
Maybe you don’t have the best credit, but another family member (or close friend) does, and is willing to help you out. A cosigner is somebody who basically takes on the financial responsibility of paying the loan if you end up failing on it. This can help make sure you get approved for the loan by basically using their credit score in place of your own.
Being a cosigner can be very risky, because if they can’t pay off the loan, their credit takes the hit. Be sure before you approach somebody to be a cosigner that you can definitely afford to take on the extra expense, and won’t lose your job in the near future. Nothing ruins a close relationship like forcing someone close to you to pay for your loan.
Set a Budget
Once you’ve gotten pre-approved, it’s time to set up a budget to incorporate your new monthly expense. Start by listing out existing bills you have to pay, including rent/mortgage, your cell phone bill, utilities, groceries and other things necessary for survival. Then, consider other expenses that are preferences, like eating out or paying for hobbies and entertainment. How much will you need to sacrifice in order to include your car loan?
Be sure to include in your budget the occasional car maintenance costs, and set aside a little bit of money for when the car needs to be repaired. If you plan on buying an older used car, you might need to spend more money regularly to keep it running. You’ll also need to include costs like car insurance and gas into your budget.
Go to Multiple Dealers
Just because you got pre-approved for a large loan doesn’t mean you have to buy a car that expensive. Shop around for the best deal on a car that matches your need. Go to a variety of dealers, including new and used car dealerships, and find the right solution for your needs. Hopefully, that means finding a car that can do what you need it to do and fits in your budget.
If you can, get the loan from a non-dealer lender, as you’re likely to get better terms from them. Many dealers will try and put pressure to get a loan through them, but by shopping around and getting pre-approved earlier, you’ll be able to show them you can get a better loan somewhere else.
Plan on Negotiating
Just because you have bad credit doesn’t mean you can’t fight to get the best loan you can. Many lenders are willing to work with you to find the best solution. Just be aware that you might have to make sacrifices in other terms of the loan. You can get a lower monthly payment, but it might mean paying a higher APR or having a longer loan term.
Again, getting multiple pre-approvals can be very helpful in negotiating. You can ask a lender if they can match or beat what another lender is offering so you can get a better loan.
Make a Plan to Pay off the Car Loan
So you got approved for the loan, and are buying the car. That’s not the end of it though. You need to make sure you can pay off the car loan and eventually completely own your car. Right now, your car is the collateral for the loan, meaning if you fail to pay it off, the lender will take away your car. Then, you’ll be in an even worse situation. You’ll again have no car, you’re credit is going to be even worse, and it’s going to be even harder to get a new loan to buy another car.
Plan out how you are going to pay off your loan in the long run so you can keep your car. If you have extra money come in, consider putting it towards your car loan instead of spending it on unnecessary things. The earlier you can pay off your loan, the sooner you can put that money towards other things.
It is possible to get a car loan when you have bad credit, but it requires extra work and planning. The more effort you put into it, and the better prepared you are when meeting with lenders, the more likely you’ll get a good loan. Then, by paying off your loan on time and in full, your credit score will improve, meaning next time it will be easier to get a car loan.
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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated February 28, 2019. It was originally published April 14, 2018.