When in need of a vehicle, the initial instinct may be to seek a car loan, particularly if cash is limited. While this remains a viable option for several individuals, getting a loan may be challenging if you have bad credit.
The likelihood of your car loan approval is significantly tied to your credit score. A score of 650 and above is typically regarded as good, making you less of a financial risk to lenders.
On the flip side, having bad credit or no credit history can impair your chances of getting a loan. Nevertheless, all is not lost. Here are some strategies for securing a car loan with bad credit.
1. Review Your Credit: Firstly, assess your credit status. You might be under the misconception that your credit is too poor to secure a car loan, but you might still qualify. As per reports, the average credit score required to purchase a new car is 714, and 655 for a second-hand one. Despite having a lesser score, obtaining a loan is possible, though it would carry a higher interest rate. This leaves you with the possibility of improving your credit score before applying for a loan if you wish to avoid a high interest rate.
2. Choose Credit Unions: Credit unions or banks are advisable over dealerships when trying to secure a car loan with bad credit as they generally offer better rates. A personal loan with a lower interest rate to buy a car off the dealership lot can also be an option.
3. Consider a Cosigner: If your credit is poor and you are uncertain about qualifying for a loan, you can opt to have a cosigner with good credit. Having a cosigner can significantly boost your loan approval chances, but it’s critical for them to understand their obligations. In case of a loan default, the cosigner will be held liable.
4. Explore ‘Buy Here Pay Here lots’: These lots differ from typical car dealerships; instead of financing a vehicle through a private bank or lender, you make the payments directly to the lot. They often accommodate borrowers with a poor credit score.
5. Larger Down Payment: Another tactic can involve saving up for a significant down payment, enabling you to secure a car loan with reasonable terms. This approach lessens the lender’s risk as they receive a substantial portion of the money upfront for the car.
Getting a car loan with bad credit might be challenging, but it’s achievable. The mentioned strategies, coupled with efforts to improve your credit score, would smoothen this process in the future.
