A Quick Guide to Snagging a Car Loan With Less Than Perfect Credit

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Most often, auto loans are the only option for people who want a new car but need help with financing. Car dealers will naturally take a look at your credit score to factor how much, and at what rate, you qualify for. A low credit rating typically means either a history of missed payments or late payments, being a victim of identity theft or just not having sufficient years of credit history. This can put a monkey wrench in your plans to purchase a new vehicle, as car dealers are very hesitant to let anyone with a low credit score drive off the lot with a brand new car.

Now the good news is that you won’t be destined to pay a higher rate on your car loan just because you don’t have a worthy credit score. In case you’re someone who has few blemishes on your credit report but you still need car loan financing, this is the perfect guide for you. Read on to know your options and how poor credit score affects your lending capabilities.

Credit score – What constitutes your score

Before we start on how you could get a car despite having a trashed credit score, you first need to understand what a credit score is. It is a 3-digit number which is computed based on your entire credit history. FICO score is the one which controls the market and hence you’ve got to worry primarily about this FICO credit score, which ranges between 300 and 850. As per the experts, any score which is below 540 stands the risk of being denied on a car loan application and a person with a credit score higher than 750 stands the best chance of grabbing a car loan.

Your credit score is entirely based on your financial history which includes student loans, credit cards, mortgages and auto loans. The FICO score calculates payment history which includes the time span of opening your accounts, late payments, how often you use the accounts which you have and the number of credit lines which you’ve opened. Every individual’s credit history is different and so there are few factors which hold more importance than others. So the way in which your credit score will be factored will be different from another person’s.

Bad credit rating and how it affects your auto loan

In general, a credit score which is 750 or higher will help you get the best rate on your car loan and you may be successfully able to grab a loan even at a 0% rate. On the other hand, if you have poor credit, which means a score below 580, you may be offered interest rates which are as high as 20% or even 30%. This means paying hundreds of dollars more on auto loans than if your credit score were better.

Lenders want to be confident about the borrower being able to repay their money back in full and on time and this is the reason they offer some of the best rates to the people with good credit scores. Consumers with poor credit scores are seen as high risk — with things like defaulting on loans, missed payments and a high DTI ratio all raising red flags for the lenders; so they charge higher rates. Your income, work history, the type of loan you’re getting and how long you’ve been working with your current employer is also taken into account by lenders.

A bad credit score and shopping for auto loans – How to game the system

Now that you have realized that your chances of snagging an auto loan with a poor credit score are going to be tough, you must be wondering where you should go in order to get loans for buying a car. Anyone who shops for a car should also shop around for a car loan lender. It is not true that you’ve got to settle down with the first offer which you get. However, some sources that you should take into account are:

  • Credit unions
  • Banks
  • Car dealerships
  • Dealer Financial Services Group
  • Finance companies

Getting an auto loan – A few steps involved

Irrespective of the reason for having a bad credit score, you will always find it difficult to get an auto loan for bad credit score. But follow these steps to secure a fair loan.

  • Ask yourself how badly do you need a car

What is the reason behind buying a car? Is it because you don’t have any other mode of transportation to work? Or is it simply due to luxury reasons? Take a close look at your current financial state to check whether or not you have any other option apart from getting yourself a new car.

  • Check and double-check your credit report

You’re allowed to get a free check on your credit report once a year. Check what your score is, what it reflects and what has affected your score the most. If you note any bogus activity, take immediate action to remove it and boost your score. If the reasons for a low score aren’t that bad, lenders may choose to work with you.

  • Select a loan with short repayment terms

You may think that low monthly installments on a 5-year loan are better than a 3 year loan with high rates but you should focus on the interest rates. Generally interest rates on shorter loan terms are more reasonable, which means you’ll end up paying less overall.

  • Think of getting a cosigner

Depending on your present situation, getting a cosigner can be your best option. If your income is lower than the requirement set by the lender or if you have poor credit or if your DTI ratio is too high for the loan, you should definitely consider a cosigner who can help you you out.

Whether you’ve made some financial mistakes or you have little credit history, having a poor score can bar you from getting favorable lines of credit. Start off by asking a credit union or a local bank for loan help, as there are certain larger national banks which can assist you in securing a loan even when you have a tarnished credit report.

Melissa Thompson writes about a wide range of topics, always revealing interesting things we didn’t know before. She is a freelance producer for USA Today, and a contributor at Technorati. She lives in Utah with her 2 kids and husband. Melissa Thompson can be reached via LinkedIn or Twitter @melthompson88. Please follow and friend her on either site.