Cars make your everyday commute easier. While buying a car costs a lot of money, owning one saves you from a lot of stress. If you have a few thousand dollars lying around then you can easily buy a car using cash. However, if you are like most of us, you would want to consider looking for car finance companies or a lender that can help you buy the car of your choice.
Car Finance 101: What to Do to Get Car Financing with Bad Credit
Do not give up on buying a new car just because of bad credit. Bad credit can make the application process complicated, but it is not impossible. It will take a few extra steps, but people with bad credit can get approved for car loans.
Things to Do Before You Submit Your Application to a Car Finance Company
1. Check your credit scores.
Before applying for car financing or a loan, it is a good idea to get a copy of your credit reports. Having a copy of your credit reports will give you an idea just how bad or good your credit score is. Knowing your credit scores gives you the benefit of applying for a loan that is geared specifically to your credit profile.
If you are not in a hurry to buy a car, you can still try improving your scores before submitting your application to a car finance company. After all, a better credit score results in better terms and a lower interest rate, which in turn saves you money. Some of the things you can do to improve your credit score include the following:
- Pay all your bills on time.
- Reduce your debt.
- Remove inaccuracies in your credit reports.
2. Research for multiple car finance companies or lenders.
There are many car financing or loan institutions out there. If you have run into some issues with one lender, you could always try looking for other lenders. There are even lenders that focus on serving people with bad credit scores, but you have to expect to be offered loans at a higher interest rate.
You can also look for car dealerships that work with people who have bad credit. The dealership may have an agreement with lenders who accept subprime borrowers, or that can offer to finance your loan themselves.
3. Prepare some money for a down payment.
You may be able to lower the monthly payments to your car loan by making a downpayment upfront. Doing so can get you a better interest rate or possibly shorten the term of your loan. The lender or the car finance company will consider your money-in-hand when determining how much of a risk it is to give you a loan.
4. Know your limits.
You should have an idea about how much you can afford in terms of monthly loan payments. Knowing your limits will help you choose a car that is within your price range. Using this information can help you research current average car loan interest rates, which will be useful during negotiations.
Options for Getting Car Financing with Bad Credit
If you do not have the time to improve your credit scores, or if you need a car right away, here are some options that you may want to consider:
1. Get a cosigner.
A cosigner with good credit can help increase your chances of getting approved for car financing. You can also get better interest rates with the help of a cosigner.
What difference does a cosigner make? They are essentially telling the car finance company or the lender that they will pay your debt in the case that you do not or cannot.
2. Try a BHPH dealer.
What does BHPH mean? BHPH means “Buy Here, Pay Here”. It is a method used by car dealership where they extend credit to their client. The traditional way is buying a car from a dealership with the help of a third party lender, while the BHPH method allows you to choose the car at the dealer and finance it there as well.
Simply put, the dealership is also the car finance company. The same company that will profit from the car sale will be deciding to approve or decline your loan. Since this is the case, BHPH dealers tend to be more flexible when giving financing to clients with bad credit scores.
3. Look for a second-chance car loan.
A second-chance car loan, as the name suggests, gives people with bad credit a second chance. This option may sound appealing, especially when you have been turned down by several conventional lenders and car finance companies. However, certain things decrease their appeal, such as higher interest rates and fees.
4. Try and check with a credit union.
A credit union is a member-owned financial cooperative. Whether you are a member of a credit union or not, you may want to consider it as an option for financing your car. These unions are known for offering loans with low-interest rates and excellent terms. They are also known for assisting people with bad credit.
Check if you have a credit union associated with your employer or a professional organisation to which you belong. Doing so can help you get pre-approval for a loan before you go to the dealer of your choice. Getting pre-approval before going to the dealer can give you more confidence to shop for a car, since you know what models you can afford.
Take note that the membership to specific credit unions are restricted depending on your location, company, or any other groups you may be affiliated with at the time. You can try and contact them if you are not sure if you are eligible to be a member of a particular credit union.
Can Car Loans Impact Your Credit?
The short answer is yes—getting a car loan will have an impact on your credit. The effects could be good or bad, depending on how you will handle your repayments. You will have a new loan account that will be listed in your credit reports. Generally, lenders and car finance companies will report your payment history to one or all of the three major credit bureaus.
Your payment history will be a part of your credit report. That is why you should be punctual with your payments. Any missed payment could negatively affect your credit score and the inability to make payments on schedule multiple times could result in your car getting repossessed by the lender.
You need to make your payments on time. The same way that late payments are recorded, positive information—such as punctuality in payment—will be recorded in your file. This will help improve the overall health of your payment history.