When your credit score seems less than stellar, it can result in a high interest car loan and bad credit. It can also put you in a double jeopardy of forcing you to go to a car dealership with bad credit – one of the “buy here, pay here” outlets, or the ones that act as dealers and lend you a loan. money at high interest rates. .
There’s no getting around the problem: a bad credit score and bad credit can create problems when buying a new or used car. What is a good and bad credit score? We will take a look.
What is a good and bad credit score?
Good and bad credit scores are determined by the big three credit bureaus, Equifax, TransUnion and Experian. These credit reporting agencies track your spending and payment habits and assess your creditworthiness accordingly.
The scoring system results in a FICO score, an acronym for Fair Isaac Corporation, a California-based credit analysis company.
FICO scores range from “Poor” to “Outstanding”.
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800 to 850
According to Experian, about 67% of Americans received “good” FICO scores of 670 or better in 2020. If your credit score falls below the “good” level and is affected by factors such as the current pandemic, it It can be difficult to get a good car loan with bad credit.
But it is not impossible.
Determine what you can afford with interest
There can be impossibilities in life, but getting a bad credit car loan doesn’t have to be one of them. Buyers of cars with bad credit scores manage to get approved for car purchases all the time. It takes good planning to get the loan you want and the car you need.
While bad credit cars exist at âBuy Here, Pay Hereâ dealerships, traditional car dealerships also offer loans with higher interest rates and this is the best option overall (read on to find out why).
Remember – you can check out the Used vehicles, too much.
To get a car loan with bad credit, you need to remember the following:
- Higher interest rates. Low FICO scores mean higher interest rates.
- It takes time. Bad credit did not happen overnight; Repairing it takes time and dedication.
- Keep expectations under control. Match your expectations with your credit history.
This last point bears repeating: keep your expectations in line with your credit history. In other words, it’s not smart to want an overseas-built luxury cruiser when your budget and credit score is more in line with buying a second-owner domestic model which can be a tier finish or two compared to the top of the range.
There will be time for that later.
What to Know About Auto Loans and Bad Credit
Banks and other lenders are on a mission to make money with money. This happens by lending to others and charging interest for the use of the funds. As with most things in life, relationships with banks and lenders are built on trust. Lenders generally trust potential buyers who have excellent credit scores and a record of on-time performance to pay their bills on time.
On the flip side, banks don’t trust borrowers with lousy credit as much and hedge their bets by charging much higher interest rates for a car loan. Yet bad credit auto loans do exist for buyers at traditional dealerships. The terms of bad loans have more restrictions than at the other end of the auto loan spectrum. Check your local dealership and learn about loans by logging into their auto finance department.
Buying a car with bad credit can be a path to a better credit rating. But it’s best not to make mistakes by choosing a vehicle that is more expensive than you can afford. Such a case of biting more than you can chew can be detrimental to your future financial well-being.
Another thing to consider is that after about a year of timely payments on your car loan, your credit score will likely improve. As your credit rating increases, you may be able to refinance the loan, this time at a lower interest rate.
Tips for getting the best car loan despite bad credit
The number one tip for getting the best car loan is how bad your credit can be. Determining your FICO score is a good start, but it will be on your credit report.
If you can live without a car for the immediate future, do your best to improve your credit score first.
Consider free credit counseling
Take action and consider enlisting help from national nonprofit credit counseling agencies such as Take charge of America (TCA), a Phoenix-based credit counseling service, or Consumer credit counseling services in Atlanta.
These credit counseling agencies can help people with poor credit by consolidating payments at reduced interest rates. They can help you get back to a healthy financial situation sooner than if you continued to pay off your debt the traditional way.
Improving your credit before you buy the car may not be the exact plan once life gets in your way.
âThere are times when it is necessary to buy a car before credit scores can improve. Keeping a job may require it, or a medical condition may make it critical. A consumer with poor credit can often still get credit, but needs to be careful, âsays Michael Sullivan, personal financial advisor at TCA.
A co-signer with good credit shows that others believe in you, so maybe the lender should too. If possible, check with a friend, relative, mentor, or someone else who will support you during this time of need.
Compare Auto Loan Offers – What To Look For
Besides buying a car that suits your needs and your means, other factors can help you, especially when comparing auto credit offers. Try these tips.
- Avoid âbuy here, pay hereâ dealers that are meant to sell you credit rather than a reliable car. With interest rates reaching 30%, you could be digging a hole. On top of that, there is no benefit to your credit score, as these types of car sales lots are unlikely to ever report your payment history, leaving you with no traceable record of paying bills on time.
- Buy your vehicle from a traditional dealership rather. Traditional dealerships use various lenders offering more reasonable interest rates for auto loans. These interest rates may be higher than what someone with exceptional credit will pay, but will help build your credit. The loan will help you improve your credit score, provided you pay off the loan on time, as planned.
- Other options, such as a credit union, can help. If you walk into a dealership with a pre-approved auto loan from a credit union, the dealership will have an incentive to beat that interest rate.
- Bring a larger deposit. Try to give the dealer as large a down payment as possible. The more you pay up front, the less you spend in the back and hopefully at a cheaper interest rate.
How To Check Your Credit Score For Free
Consumers can access their credit reports free of charge. Credit reports are available online from the three credit bureaus (Equifax, TransUnion and Experian) as well as through AnnualCreditReport.com.
Upon receipt of your credit report, check for errors and frauds. Didn’t you request that a credit card be sent to a US PO Box in Sturgis, South Dakota? Or has a payment history belonging to John F. Doe found its way into John P. Doe’s credit history?
Once you’ve checked your credit history, you’ll know where you are before you head to a dealership and have to hear what could be bad news from a third party. We went there, we did it and we have the t-shirt which luckily no longer fits.
Remember, knowledge is power.
Ways to improve your credit today
Just as your credit history hasn’t deteriorated overnight, it will take time to improve. The length of time depends on the severity of the offenses and your level of dedication. According to Experian, it could take several months to years, including if your last car was trade in. Collections and late payments stay on your credit report for seven years, while Chapter 7 bankruptcies stay there for up to 10 years, the credit agency said.
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So it takes patience, effort and some helpful advice.
How to buy a car with bad credit
- Pay all your bills before they are due. Also make sure you pay any overdue bills for your accounts. Payment history is a critical factor in maintaining a good credit rating.
- Reduce your debt. Paying off debt improves your financial situation and improves your credit utilization rate, or how much you currently owe on any credit card, divided by your credit limit. Keep your credit to debt ratio below 30% of your available credit.
- Check your credit report for errors or fraud. Errors and frauds happen more often than expected and can take a toll on your scores. If you suspect fraud, contact your credit bureau immediately and put a free credit freeze on your account.
- Contact a free credit counseling service. These nonprofit credit agency services can help you put a plan in place to get you on the right track (as described above).
- Don’t close credit card accounts. Keep your credit card accounts open. It seems better to lenders that you have more credit available that you aren’t using than a bunch of credit cards with maximized balances. It also shows that you have discipline, which is a very desirable trait in the eyes of a lender.
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