Obtaining auto financing for bad-credit customers is not as difficult as one might expect, but bad credit auto financing exacts a financial penalty in the form of high interest rates or the requirement of a large down payment, or both.
In this article about bad credit car financing, we’ll explore how to get auto financing for bad credit car buyers.
Before attempting to arrange bad credit auto financing, get copies of your credit report from each of the three main credit reporting agencies: Experian, Equifax, and TransUnion. Federal law requires these companies to provide each person with one free credit report per year, and consumers can request all three copies using the AnnualCreditReport.com website.
When you receive your three credit reports, review them closely and complete separate dispute forms for each credit-reporting agency for every error you detect. Federal law requires Experian, Equifax and TransUnion to remove inaccurate credit report data if the information cannot be verified within 30 days of receiving a dispute claim from a consumer.
By taking this initial step, you become aware of everything appearing in your credit report and you can remove inaccurate information to increase your credit score.
At the same time that you’re working with the credit reporting agencies to clean up your credit report, be sure to make all payments for all bills on time. If you can show several months of on-time payments, or, preferably, a year or more of responsible bill-paying behavior, you are more likely to be able to obtain bad credit auto financing.
Once you’ve taken steps to clean up your credit, your first stop to obtain bad credit car financing is the bank, credit union, or other financial institution with which you regularly conduct business.
The reason you want to make your bank or credit union your first stop is because they will have first-hand knowledge of your finances, your bill-paying history, your overdraft history, and whether or not your income is steady. Customers with bad credit but demonstrable examples of current fiscal responsibility are a lower risk for lenders.
If your regular bank or credit union is unwilling to provide bad credit auto financing, a car buyer can apply for a loan through what is called a “sub-prime” lender. These are financial institutions that exist to serve consumers with bad credit.
Logically, a car buyer with bad credit represents a financial risk for any lender, and so the lender is likely to extend a loan with an interest rate measuring double or triple what car buyers with good credit might pay. Alternatively, or additionally, the lender may request that the buyer make a cash down payment of 20% or more for the vehicle, to reduce the risk associated with the loan.
Auto financing for bad-credit customers is available through a traditional car dealer, but because your low credit score already dictates that you will pay a higher interest rate than consumers with good credit ratings, obtaining bad credit car financing through the dealership will be even more costly than through your bank, credit union, or a sub-prime lender. This is because car loans arranged through dealers are typically more expensive, because the dealership takes a percentage of the interest rate on the loan as profit.
If you are absolutely positive that you will make your car payments, on time, without delay, and never late, with no excuses, you could ask a friend or a relative to co-sign your loan to give the financial institution additional confidence in the loan, and to lower the interest rate, reduce the down payment required, or both.
However, you also need to know that if you don’t make your car payments, on time, without delay, and never late, with no excuses, that you will not only damage your own poor credit rating even further, but also your friend’s or relative’s credit rating. In fact, if you decided to stop paying for the car altogether, the financial institute would hold your friend or relative responsible for the entire unpaid balance on the loan.
That’s not good for maintaining healthy relationships, and that’s why we urge you to avoid using a co-signer as a solution unless it is absolutely necessary in order to obtain car financing for bad credit.
As a last resort, you could buy a car from what is known as a “buy here, pay here” used car dealership. While these types of establishments will finance anyone, no matter how bad their credit, they also sell high-mileage vehicles in marginal condition for a price much higher than market value. Plus, the interest rate on the loan is extremely high, payments are due weekly, and if you’re late, the car gets repossessed quickly.
Using a “buy here, pay here” dealership to obtain bad credit car financing should never be your first choice when trying to arrange auto financing for bad credit.