Your credit history is a significant factor in getting approved for a car loan. In this article, we will look at ways of clearing up credit to buy a car.
Your credit history is a significant factor in getting approved for a loan. Plus, your credit rating will affect the amount of interest you’ll pay financing your purchase.
Unfortunately, even if you have a stable job history, buying a car with bad credit is hard.
Some of the factors that can bring your score down include late payments, high debt, bankruptcy, or repossession.
The good news is, with time, you can rebuild your credit.
What’s a good credit score for a car loan?
A credit score range from about 300 to 850, with 850 being excellent, and below 300 is considered low. Most people start with a score of around 500.
For a car loan, you want to aim for at least 630-650 as this is what lenders typically want. Higher is better obviously.
According to credit bureau Experian, in 2020, the credit score needed for a used-car loan was 657 while the average credit score required for a new-car loan was 721.
What if your score is lower?
Still, according to the same Experian report, almost 30% of car loans went to borrowers with credit scores below 600, according to Experian. Nearly 4.5% of used-car loans went to those with scores below 500.
For example, getting a used car loan with a score in the low 700s might see rates around 6.05%, but with a mid-500s score, the rate goes up to 17.78% or more.
That means for a five-year loan of $20,000, someone with poor credit could pay $505 per month, while someone with a score in the low 700s might pay $387.
That translates into about $3,222 in interest over the loan’s life, while the buyer with lower credit would pay $10,329.
Plus, bad credit can mean higher car insurance rates, too.
What do you need to do to keep your credit score good?
The major factors are how much of your available credit you are using (known as “credit utilization”) and paying your bills on time, or at least the minimum payments.
Keep in mind that payments can take two months to reflect in your score.
Four things to keep your score in good shape are:
- Keep credit card balances (known as “credit utilization”) low compared to your credit limits, ideally not over 30% of your limit.
- Pay bills on time. A late payment over 30 days late can harm your score a lot, so pay at least the minimum on time.
- Avoid applying for other credit within six months of applying for a car loan.
- Keep any credit card accounts open as closing cards will reduce your overall credit limit, hurting your credit utilization.
Here are 12 Tips for Buying a Car With Bad Credit
Bad credit doesn’t have to prevent you from getting a car, but you’ll have to be prepared for a higher cost.
Work on Your Credit Before Shopping For a Car
The first step is to know where you’re starting from. Check your credit report first, even if it’s months or years in advance. There are several services you can use.
Once you know your current score, identify the items that are hurting your credit score. Items might include past-due accounts, outstanding balances and credit report errors.
Avoid Adding More Bad Credit
In the months leading up to your loan application, pay everything on time and don’t take on new debt. Lenders look for red flags like late rent payments, debt collections, bankruptcy, unpaid taxes, and lawsuit judgments.
Know What The Current Interest Rates Are Before Getting a Loan
You can check online for auto loan rates to better understand what interest rates you can expect. With good credit, you’d qualify for a rate at or below average. You’ll typically have a higher interest rate with bad credit, but be sceptical of any loan rate more than double the average.
Remember, a lower interest rate means lower monthly payments and the ability to get a larger loan for more car.
Try and Make Bigger Down Payment
While your score will limit the size of the loan, you can get, if possible, make a larger down payment. The downpayment can offset the interest, taxes, and fees you’ll have to pay.
Know What You Can Afford to Pay
Know how much money you have leftover after paying bills each month, that’s going to be what you can afford to pay, even if you’re approved for a loan with more considerable payments.
You can shop more realistically when you have a preapproved loan amount to work with. Talk to your bank about getting preapproved for a car loan.
Skip the Extras
You may have to sacrifice some of the features you want like leather seats, or a sunroof. Think of what you need, bigger speakers or air conditioning?
Nonprofit Agencies Might Be Able To Help
Before you take on a loan, check if any nonprofit agencies offer loans or vehicles to low-income consumers.
Tread Carefully With Buy Here, Pay Here
Some dealers offer on-site financing with less stringent credit qualifications (sometimes with no credit check). The downside is they have a reputation for selling overpriced, poor-quality vehicles. Ask for dealership recommendations, and check the value of the car and vehicle history.
Also, take a mechanic friend shopping with you to check out the car to ensure there are no problems that will cost you more in repairs down the line.
Read All the Paperwork.
Loan documents can be confusing, but this is your money on the line, so it’s essential to read and understand the loan terms.
Make sure what you’re signing matches everything the dealer verbally agreed to. If you agree to the terms, sign the loan documents before driving the car off the lot.
With these tips, you should be able to get your credit score back in order so that you can get the car you need.