If you’re new to credit or are trying to rebuild, getting an auto loan can be difficult. Even though auto loans are secured by the car itself, many auto lenders are uneasy about lending to someone with a poor track record.
So, if you’re in this boat, it’s critical that you take the time to educate yourself about how to proceed the right way.
5 steps to purchasing a car with a low credit score
To help you, we’ve put together five steps you can take to getting a car loan with bad credit.
1. Check your credit score
If you haven’t checked your credit in a while, it’s possible that it’s no longer considered “bad.” In general, a FICO credit score of 300 to 579 would be in the bad credit score range.
There are many credit score monitoring services out there that offer free access to your credit score. So, take a moment to check your score. If it’s higher than the range we just mentioned, you’ll likely have a better chance of getting approved on your own with a regular lender.
But if it’s still in the bad range, you have work to do.
2. Improve your credit score
If buying a new car isn’t an urgent need, it may be worth taking some time to find ways to boost your credit score.
Depending on the credit monitoring service you use, you may be able to see the different factors that are influencing your credit score. To give you a quick summary, factors generally include:
How much you owe
Length of credit history
Mix of credit
Your payment history and how much you owe are the most influential factors, so make sure you’re caught up with your payments and take some time to pay down some of your debts, especially credit cards. As you take these actions, you may see your credit score respond as soon as a few months’ time.
3. Consider getting a cosigner
If your credit isn’t good enough to get approved on your own, you could improve your chances by getting someone with a great credit history to apply with you. In some cases, a cosigner can even help you score a lower interest rate.
If you’ve made some credit missteps in the past, though, your close friends and relatives may be apprehensive about the idea of cosigning.
When someone cosigns a loan with you, they’re legally responsible for paying it off if you stop making payments. The loan will also show up on their credit report. So, not only would a default violate their trust, but it could also ruin their credit and financial health.
If you’re planning to go this route, have a conversation with your cosigner and explain your plan to pay off the loan and keep them apprised throughout the process.
4. Shop for a modest car
If your credit is less than stellar, you can expect to pay a high interest rate — in most cases, it’ll be double digits, and some lenders go as high as 20% or more.
To avoid getting stuck paying a boatload of interest, try to limit how much you borrow by shopping for a modest car. Of course, you’ll want to be wary of lemons, but you also don’t want to borrow more than you can afford.
Consider skipping the add-ons like gap insurance, maintenance contracts, and service warranties. The cost of these extras would be rolled into the loan, which means you’d be paying a high interest rate on them.
5. Look for specialized lenders
Many lenders specialize in working with consumers with bad credit. Some of the bigger ones include Capital One, MyAutoLoan.com, and SpringboardAuto.com. All of these lenders offer reasonable interest rates and other terms.
Don’t just go with the first offer you like, though. Shop around and consider offers from multiple lenders, and compare rates, restrictions, and repayment terms.
Try to get pre-qualified without an official application if you can. For example, Capital One allows you to do this with no hard credit check. This means getting pre-qualified won’t impact your credit score.
The bottom line
Getting an auto loan with bad credit can be expensive, but it’s not impossible. If you do have some time before you need a new car, consider working on your credit before you start shopping around.
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles. The information is accurate to the best of our knowledge when posted; however, all credit card information is presented without warranty. Please check the issuer’s website for the most current information.