Quick facts about bad credit car financing:
Even borrowers with numbers in the lowest credit score categories can find auto loan financing.
You should dispute errors on your credit report if you find inaccurate information that lowers your credit score.
Increasing your car down payment will help convince potential lenders that you are serious about your finances.
Financing a car with bad credit can be difficult but not necessarily impossible. The credit experts at Experian EXPGY,
report that loans to higher risk borrowers decreased as a percentage of all auto loans in the third quarter of 2023.
Here’s the truth about getting a car loan: Lenders make money by making loans. They don’t just want to finance cars, but they need to finance cars to survive. Your goal is to find a lender willing to finance your next car by presenting yourself as “low risk” as possible. Read the five keys to doing that.
1. How do I get my credit score?
Your credit score is a snapshot of your creditworthiness at any given time. This can change from week to week or month to month. If you haven’t checked it in the last six months, do so before shopping for a car loan. This is the first piece of information that the lender considers. It serves as the best preliminary tool a lender uses to determine your credit status and the interest rate you qualify for. There are several legitimate online sources for getting your score, such as Experian’s Free Credit Score. Many credit card companies provide free credit scores to cardholders.
Credit scores for car loans
Borrowers in Experian’s Subprime and Deep Subprime categories often have a significant ding in their credit in the recent past. Subprime borrowers have credit scores of 501 to 600; the Deep Subprime category is below 500. Loans sent to collection, bankruptcy, or the repossession of a home or car may drop the borrower into one of the lower credit-score categories.
The good news is that car financing is not only available to those with gold-plated credit. However, lenders issued fewer auto loans to those with weak credit in 2023 than last year. The most recent data available shows that both categories of borrowers took about 14% of all new and used car loans in the third quarter of 2023.
Borrowers in Experian’s Near Prime category fell back after an uptick over the past two years. These are borrowers with a credit score between 601 and 660. In the third quarter, they got about 17% of all new and used car loans. That share decreased from about 18.33% in 2022 and 18.61% in 2021.
In addition: 19 ways to save money on your next car
2. How do I get my credit report?
While a credit score is a snapshot of your current credit health, a credit report provides your credit history, including past and active loans, and whether you make payments on time. It will also show any loans that have been collected, bankruptcies, and foreclosures. Three major credit reporting agencies – Experian, TransUnion TRU,
and Equifax EFX,
— collect information from lenders to create your report, which they provide to lenders upon request. You need to know what’s on your report before a potential lender sees it. You are entitled to one free report each year from each agency. Order your report and use it as a roadmap to fix any negative information.
See also: Here are the 10 cheapest new cars for 2024
3. How can I raise my credit score and report?
Don’t ignore that lenders provide the three credit reporting agencies with accurate information. They make mistakes. Each agency has its own established procedures for disputing false information. If you find an error on your credit report, file a formal dispute with the reporting credit agency yourself. You should do this with each agency where the false information appears. They don’t talk to each other.
Take the time to do whatever you can to clean up any legitimate negative marks on your report. Pay off collection balances, and pay all accounts to bring them up to date. Paying your creditors on time is the best way to improve your credit score.
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4. How important is the down payment?
Anyone under financial stress may struggle to scrape together a decent down payment. However, the more “skin” you have in the deal, the more likely a lender will take a chance on you. A large down payment may even encourage the lender to charge a lower interest rate. Lending involves risk. Lenders believe that the more equity (down payment) you have in a car, the less likely you are to default on the loan. Whether it’s a home loan or a car loan, lenders see 20% as a reasonable fee. The better your credit, the better your chances of putting down a smaller down payment. However, if your credit is very weak, putting up more can help convince a lender that you are serious about your finances. This will improve your chances even more.
Also read: Stuck in credit card debt? 0% balance transfer cards will be the way to go in 2024 – if you know the rules
5. Where can I get a car loan?
No matter how weak you believe your credit is, it’s better than you think. Before stepping foot on a dealer’s floor, you should approach various lenders to get pre-approved for a loan. Remember that finance companies are probably your best shot at getting a subprime loan. However, banks and credit unions are starting to look more favorably on borrowers with less-than-good credit. Don’t dismiss them in your search.
Even the lending divisions of some automakers, such as GM Financial, are open to financing a car for those with weak credit. You must apply to these car finance companies owned by the dealership. However, shop ahead for an idea of the ballpark of the interest rate you can expect because it affects how much you can afford to buy a car.
Your last resort may be a “buy here, pay here” (BHPH) dealer. If you need to finance through a tote-your-note seller, take a little time and find someone who works with one of the credit bureaus. You will pay a higher interest rate than through a conventional lender. So, you can make sure you get credit for your payments on time. This will make securing your next car loan much easier and you may be able to get a lower interest rate next time. If you look for enough buy-here-pay-here options, you may find a franchise car dealer that does BHPH deals on used cars.
Learn more: What is a buy here, pay here car dealer? Here’s what to know about this ultimate way to buy a car.
This story originally went on Autotrader.com.