Car loan lenders offer their best rates to customers with good and excellent credit. But for consumers with bad credit, just qualifying for a car loan can be challenging. In this article, we talk about important concerns that borrowers in search of a bad credit car loan may encounter.
Factors that Affect Car Loan Terms
Lenders impose varying rates and repayment terms based upon a number of factors such as:
- the ratio of debt to income
- the amount of loan and the amount of down payment,
- the borrower’s present economic status,
- credit history,
- credit score
- age of car you are buying
- how you have paid for past car loans
How to get the best rates
If you have some time before you plan on applying for a car loan. Then you should work on improving your credit score.
Here are some articles that will help you to make big changes to your credit score
- How to write an effective dispute letter
- How to negotiate a paid for deletion with a collection agency
- How to negotiate with collection agents
Dealing With A Low Credit Score
Let’s face facts. If you have a low credit score, you can expect to pay a higher interest rate than someone with great credit. Therefore, time permitting. If you have the time to fix your credit before heading down to the auto dealership, you should!
- Check for errors – Improve your credit by checking your report for errors or negative information which can be corrected.
- Remove old negative accounts – Errors and negative remarks older than seven years should be removed from your credit report and you can make a request by sending a letter to the bureau that issued your report.
- Dispute: Dispute any inquiries you didn’t make. Hard inquiries can hurt your credit score. (read more about hard and soft inquiries here)
- Dealing with collection accounts – If you have recent open collections you want to negotiate those and get them re-classified or removed
If you can wait for another three to six months before applying for a car loan. Then you can use this time to improve your credit score.
Finding the Right Lender
Credit unions offer loans with lower interest rates and more favorable terms so it’s a good idea to check out your local credit union first. In fact, credit unions grant easy approval even for customers with bad credit as long as bad credit is in the past.
Many large corporations have access to credit unions. If your work doesn’t offer, you may want to ask a friend or family member to get you an account at their credit union. It won’t affect their credit and most credit unions are open to friends and family. They may even get a bonus or small referral fee for referring new clients to the credit union. Referrals are an easy way for a business to grow and credit unions have always used it to help expand their members.
If You Get Financing At The Dealership
Be aware that most dealerships may advertise a bad credit program. But they are using third party funders. And to many of them will “shotgun” your credit application to as many lenders as they have in your network.
I had a client come to me w/ over FIFTY inquiries from bad credit lenders associated with his purchase of a new car. His credit score to MAJOR damage due to this. He disputed a lot of them, but most of them stayed on his credit.
But on the other hand, I had a lady come into the office and she had been in the same situation. BUT she wrote on her credit application at the dealership, I authorize you to pull my credit 3 times ONLY. She signed it and she made the finance manager sign it. They did the same thing to her, but when she disputed it with the credit reporting agencies, they removed all but the first 3 for being unauthorized.
Dealing with the dealership – Tips
- Have your financing in place BEFORE going there
- Make sure they understand you are limiting the number of pulls on your credit. They can’t really argue that you won’t get the car of your dreams since you have already been approved somewhere else
- When you have your financing in place, you don’t fall into the “how much can you afford per month trap”. With your own financing in place, the dealer will be forced to talk to you about the total cost of the car. When you play the “per month game” you will end up paying more for the car. I dated a used car sales rep in college. This was one tip I never forgot!
- Take a copy of your credit reports with the score to the dealership – When negotiating with a potential lender, bring a copy of your most recent credit report as some lenders may try to impose higher interest rates than what you deserve. Knowing your exact credit standing will give you the confidence you need when negotiating a better deal.
- Compare car loan deals from different lending companies. Never sign up for the first good offer you see no matter how attractive the deal is. Be diligent in comparing lenders.
How To Make Up For Bad Credit
There are other ways to get a better rate in-spite of having a low credit score. make up for a bad credit. For instance, you can find a co-signer with good credit to back up the car loan on your behalf. Another way is to pay a higher deposit. If you can save up for more deposit, you can lower your interest rate and monthly fees.
- Cosigner – you can find a co-signer with good credit to back up the car loan on your behalf.
- Higher Security Deposit – Another way is to pay a higher deposit. If you can save up for more deposit, you can lower your interest rate and monthly fees.
- Shorter Loan Term – offer to accept a shorter term. Many bad credit lenders don’t want to hold a note for 60-72 months. So if you offer to accept a 36 to 48-month term, not only will you pay off the loan faster. But you will save money over the life of the loan.
Although you may have imperfect credit now, the most important thing is that your bad credit is in the past and that you are working towards rebuilding your credit.