How To Get A Car Loan With Bad Credit
Car loans are available for consumers with bad credit. Continue reading to learn how to get a car loan with bad credit today.
Car loans are available for consumers with bad credit. Not every lender who works with limited, no or bad-credit borrowers has the same policies or qualification requirements, however. Developing bad credit happens for a variety of reasons, even to consumers who strive to maintain a stable and creditworthy status. None of this precludes the need for people to own a car and get to work, school, medical appointments and more. Fortunately, many lenders understand this predicament and have car loan programs for borrowers dealing with unfortunate credit standings. Continue reading to learn how to get a car loan with bad credit today.
Understanding How Your Credit Score Works
The first thing to understand when searching for car loans with bad credit is your credit score itself. Understanding your credit score gives you the power to know what to expect when approaching lenders. Understanding your credit score also gives you the power to improve your credit in various ways before applying for a bad credit loan. This is not to say you can raise your score high enough in the amount of time you have to obtain regular loans designed for excellent credit borrowers. You just might be able to improve your interest rate and loan terms to make your life and car-purchasing experience more affordable and convenient, however.
Your credit rating, or credit score, is officially referred to as your FICO score. A FICO score is a three-digit number ranging from 300 to 850. The higher the score, the better the credit. The lower the score, the worse the credit. Essentially, your FICO score represents your level of creditworthiness to lenders and the amount of risk they must take if you are approved to borrow money. What factors influence the generation of your FICO score?
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35% consists of your payment history for the last seven years (on-time, late, missed, outstanding).
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30% consists of your total amount of current outstanding balances (total amount owed).
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15% consists of how long you have had a credit history.
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10% consists of your variety of credit types (credit cards, installment loans, mortgage loans, financed accounts, retail accounts, other types of reported credit).
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10% consists of recent credit account openings and inquires (too many recent opened accounts or credit inquiries indicates a red-flag risk to lenders).
The information you just learned is a vital part of improving your chances of obtaining a car loan, even from lenders who offer loan programs to borrowers with bad credit. Lenders charge interest on borrowed money as the cost of doing business. Installment payments on your loan are spread out over a specified period. Down payments are commonly required, especially for borrowers with bad credit. Your FICO score impacts how friendly or unfriendly these aspects are pursuant to your car loan. Continue reading to find out how.
Before You Apply for a Car Loan - Take These Steps
The first step to take before applying for a car loan is to obtain a copy of your entire credit report. This is possible to do securely and for free via the AnnualCreditReport.com website. This free report will show your FICO score and every open and closed account you have as reported to the three major credit bureaus (Equifax, Experian, and TransUnion).
Step #1: Study your entire credit report and look for ways to improve it. Do you have late payments? Do you have multiple accounts with high balances, which are close to the maximum credit limits on the accounts? Pay all your bills on time for up to six months before applying for a car loan. Pay down high balances, have any erroneously reported accounts removed or contested, and use the Experian Boost feature to help raise your FICO score even more.
Step #2: Understand what you can afford. Assess your income, debts and overall financial situation. Do not accept a car loan if the monthly payments are not affordable or push you to the limit of your monthly budget. Only take a loan where the payments are set at a comfortable amount and the down payment requirement is feasible to obtain
Step #3: Save for your down payment in advance. Do not enter a car loan application process scrambling to come up with down payment money. Plan and save for your down payment in advance. This might mean three to six months of financial sacrifices or compromise. The more down payment you make, however, the lower your interest rate and monthly payments will likely be.
Step #4: Take advantage of pre-approval processes. If you recall, having too many credits inquires in a short period of time lowers your FICO score. Pre-approval applications run “soft” credit checks, which do not hurt your FICO score. Pre-approval letters are also “can-do” lists, which let you know what cars for which you qualify and all related loan terms.
Step #5: Do not settle for the first loan offer you receive. Comparison-shop between different lenders. Online and in-person car loan options are available nationwide. Take advantage of modern technology because a friendlier loan offer is out there for you somewhere.
Maintaining Your Credit Score While Shopping for Bad Credit Car Loans
To maintain your credit score while shopping for bad-credit card loans, be certain to only apply for pre-approval status and pay all your bills on time, for the entire time. Even a missed payment seven months ago might be overlooked by six subsequent months of full, on-time payments. You must also understand how interest works on car loans. Interest is added to your loan balance in the form of an annual percentage rate (APR). As your FICO score improves, the APRs for which you qualify will get lower. APRs on car loans are generally fixed, which means they stay the same the entire length of the loan unless you refinance the loan before you pay it off in full.
Tips on Shopping for Cars with Bad Credit
Numerous top-quality bad credit lenders are offering car loans in 2021. Use the pre-approval process to get as many non-credit-damaging pre-approval letters as possible. Compare the rates each lending company offers and pick the top three. After you raise your FICO score as much as possible in the time you have, consult with each lender, and ask them to price match or beat the best offer you have. Companies such as the LendingTree and LightStream help you compare the best car loan rates available today. Some of the best bad credit car loan companies on the market in 2021 include:
Applying for a Car Loan
When you apply for your car loan you will need to provide your entire name, Social Security Number (SSN) and birthdate. Prepare to submit up to three year’s most recent tax forms, as well as your entire employment and residency history. You will also need a valid government-issued photo identification (driver’s license, passport, state-issued photo ID, green card, etc.).
