Bad Credit Doesn't Have to Stand in the Way of Your New Set of Wheels

Bad Credit Doesn't Have to Stand in the Way of Your New Set of Wheels
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Point Editorial

Credit scores are an important part of achieving financial goals. Credit scores range from 300 to 850 and fall under one of five classifications: poor, fair, good, very good, and excellent. 

FICO is one of the most widespread credit scoring models, and according to their calculations, a score of 300–579 is poor, 580–669 is fair, 670–739 is good, 740–799 is very good, and 800–850 is excellent. FICO recommends aiming for a score of approximately 670 to be in good financial standing. 

If you're looking to buy a car specifically, getting approval for an auto loan with a lower score is possible since no minimum score is required. According to Experian, the number of individuals with a low credit score who have a car loan is equal to those with a high score that possess a car loan.  

To learn more about how to buy a car with a credit score that's less than ideal, read on. 

10 tips for buying a car with bad credit 

First, it is necessary to note that lenders vary, and the credit score requirements for one party may not be the exact requirements for another. Always do your research before agreeing to anything. 

That said, here are 10 tips for buying a car when your credit score is low. 

Tip 1: Work on improving your credit

If you're unsure where to begin, knowing your credit score is a great place to start. If you don't know your score, you can't change it. Once a year, you're entitled to a free report from any of the big three credit bureaus: Experian, Equifax, and TransUnion. These reports outline your spending habits and expenses, so you'll be able to identify any areas that need improvement.

Paying your bills on time and paying off any outstanding debts are two huge factors that will boost your score, too. 

Additionally, if you see any errors in your credit history, make sure you address them right away.

Tip 2: Get a co-signer.

Getting a co-signer means that a second party applies for a loan with you. Co-signers are individuals with good credit scores, which reduces your risk in the eyes of the bank. Co-signers are often also required to pay monthly installments. Keep in mind that your actions reflect on your co-signer as well.  

Tip 3: Avoid poor financial decisions. 

In other words, be on your best fiscal behavior. Poor financial decisions – also known as "bad credit items" – include applying for multiple new credit accounts, exceeding your credit card limit, making late payments or missing them entirely, and filing for bankruptcy. 

One tool to keep in mind to keep poor financial behavior under control so that a lender will approve you for a loan – be it an auto loan, mortgage, or a student loan – is Point Card.

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Tip 4: Check current interest rates. 

Vehicle loans are not always outrageous, but interest rates can be. And with every late payment, these rates compound, which means it's easy for interest rates to spiral out of control. Borrowers with bad credit scores usually face higher interest rates. 

Tip 5: Make a bigger down payment. 

The more money you pay upfront for your new car, the lower your overall loan will be. Furthermore, being able to put down a higher deposit suggests to banks and other lenders that you're capable of paying off the loan. Also, you will be considered a less risky business venture. 

Tip 6: Know what you can afford to pay. 

In addition to knowing your credit score, knowing how much you can afford to spend on the car itself and the accompanying payments is just as important. That way, you won't overspend. Remember, the more luxurious the vehicle's make and model, the higher the up-front fee and installments are. Also, there's nothing wrong with purchasing a more affordable car. 

Tip 7: Get pre-approved. 

This strategy encourages proactiveness. If you're able to be pre-approved for a loan, a lender will check your financial background, including your credit score, and will tell you just how much you can borrow. This will help you narrow down your options for vehicles and provide you with peace of mind by knowing what the result of your loan application will most likely be. 

Shopping around to find the best loan offers is another option available to you as a result. However, each time a lender checks your credit — which is also known as a hard inquiry — it is factored into your score, so it's in your best interest that these inquiries occur as infrequently as possible. In comparison, soft inquiries — or when you personally check your credit history — do not influence your score. 

Tip 8: Skip the extras. 

Sometimes, we must compromise when it comes to the things we want. So, as much as you may want a brand-new car instead of a used model, this may not be in your best financial interest. 

Tip 9: Check with non-profit agencies. 

While this strategy isn't necessarily the most widespread, that doesn't mean it isn't a viable option. Depending on the organization, you may be able to get a loan or even access to a car if you qualify as a low-income earner.   

Tip 10: Read all the paperwork. 

To reiterate, always take your time and read the fine print before signing any loan agreement. It is perfectly acceptable to look around until you find terms that work best for you. Make sure that what the lender verbalizes is identical to what's written on the agreement. You should only sign when you are completely satisfied with the terms.

How to shop for car loans with bad credit 

According to Experian, as of 2020, you should aim for a credit score of approximately 660 or higher to have a smooth experience getting an auto loan. More specifically, the average credit score to get a loan for a used car is around 657. The average credit score for a new car is about 721. Again, there is no minimum threshold. These numbers are simply recommendations. 

There are three ways to shop for a car loan if you have bad credit. 

Shop online

Many banks and other non-institutional lenders state their loan rates on their websites, which can be helpful when you're narrowing down your list of potential options. 

In 2020, the average interest rate for a new and used car was four percent and nine percent, respectively. Individuals with a credit score of 670 or higher typically paid three percent for a new model and just over five percent for a used one.  

Go to your bank

Making a physical trip to your bank can be advantageous. Not only is it easier to negotiate in person, but your loyalty to a particular institution can open doors for you. Also, they'll have the most current records on your credit history. 

Get a loan at the dealership

This is the quickest route to buying a vehicle since you're already at the car lot. The majority of dealerships partner with banks, so these discussions are reputable. But it’s important to be aware that  some dealerships may be vague about their fees. 

How a car loan impacts your credit 

Five aspects determine your credit score: payment history, amounts owed, length of credit history, new credit, and credit mixes. 

Payment history accounts for 35 percent, and amounts owed account for 30 percent. 

Having loans can both help and hurt your score. It all depends on how you handle repayments. Paying your bills on time will reflect positively on your score and give banks more reassurance if you do business with them again in the future.  

Applying for the loan itself is another example of a hard inquiry that will affect your financial records for up to two years. Applying for multiple loans in a brief amount of time can also be detrimental. 

Having bad credit is better than no credit, but working toward boosting your score will never be a waste of time. 

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Point Editorial
A group of writers, thinkers, & designers from varying backgrounds — all part of the Point Card team. Sharing perspectives on concepts in design, finance, and culture through an everyday lens.
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