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Anyone can end up with bad credit. And anyone can have a financial downturn. Some of these borrowers have some serious dings on their credit, like bankruptcy, while others have bad credit due to a job loss. Although the folks in the latter case might now be gainfully employed, the dings on their credit will remain. This causes them all sorts of challenges, not the least of which is a near inability to get a loan in order to get a car.
But regardless of why people seek out bad credit auto loans, everyone who faces a bad credit situation should get a shot at rebuilding their credit. Bad credit car loans can certainly help folks like these re-establish their credit score after their finances have gone South.
These types of loans can also get these borrowers into the car they need, an item which most need to continue to get to work and to participate in other activities that will continue to improve their finances and their credit score over time.
If you find yourself among those who are wondering how to improve your credit score and to qualify for a car loan at the same time, keep on reading.
1. Assess Your Credit and Your Finances
If you’re trying to get a car loan but are afraid that you can’t due to a low credit score, there are some steps you can take to rectify the situation. First, you want to run a credit check. You can do so through several credit reporting websites.
These sites will show you everything that’s on your credit report. They will more specifically show you what information could be hurting your chances of getting a car loan.
You’ll want to check what types of “dings” your credit report still has on it. Do you have items on there that are more than a couple of years old that were either written off by the company you borrowed from or paid off by you? Those need to be updated.
In the event that you have, indeed, filed for bankruptcy, you’ll want to figure out if the bankruptcy has landed on your credit score or not. This will affect your ability to get your car loan.
Regardless, whatever negatives need to be addressed by you, meaning you contact each creditor and ask that inaccurate information be removed from your credit report. Or you can get help from a credit repair company. Any negatives that remain on your credit influence the type of car loan you can get. Or if you can get one at all.
Next, you’ll want to take a look at your monthly budget. Note where you’re still overspending. If you’re not sure, keep a money journal for the next 30 days. Write down everything that you spend. For example, those trips to the local coffee shop before work can really add up.
The purpose of this is to let you know where your budget might actually have some extra money in it. This information will help you figure out where you can pull some money from when it comes time to save up for the downpayment, which is covered in more detail below.
2. Re-Establish Your Credit
You may have to do a bit of repair beyond just checking out your credit report and doing some credit repair. You’ll actually want to try to get some newly-established credit in your name.
Most people in a bad-credit predicament do so by getting a secured credit card or by getting a bad credit credit card. If you do go with the secured credit card route, here’s where your budgeting will come into play.
Once you’ve identified all the ways you overspend, you’ll want to stop overspending and put that money into an account. Try to save up at least $500. This may take several months. Once you have $500 in the bank, you’ll use that as collateral for your secured credit card.
After you get your card, either a secured card (or a bad credit credit card), make purchases on the card each month AND pay off those purchases in full every month. This will help you re-establish a good credit history with your lending institution and with the credit-reporting companies.
Your best bet for this is to put your monthly bills, like your power bill or your Internet bill on the card. That way, you’re not making frivolous purchases. You’re using the card to pay bills that you’d have to pay anyway and in theory, should already be budgeting for.
Granted, having to wait several months before you apply for a car loan, even a bad credit auto loan, can be frustrating, but this really is the best way. You’re going to get a better interest rate for that loan, even if it’s from a high-risk lender if your credit score has shown some improvement.
3. Determine How Much of a Down Payment You Can Make
While it is possible with some lenders to get a bad credit auto loan without a down payment, it’s still in your best interest to try to get a down payment put together. Not only will you get a better loan rate with a downpayment, you’re doing to reduce your monthly payments by putting more down initially. In this case, it really is worth it to work that second job for three to six months to save up for the down payment.
Here’s how much of a difference it can make to have a down payment. If you buy a $10,000 car with a four-year contract, you’re going to have payments that look something like this:
- $221 at 3%
- $268 at 13%
- $294 at 18%
But if you save up $2,000 and borrow $8,000, you’ll see quite a difference in your monthly payments. Here’s that breakdown:
- $177 at 3%
- $215 at 13%
- $235 at 18%
If you’re not sure how much you want to borrow versus how much you want to put down, use the auto loan calculator to try to figure out your best deal with and without a down payment.
4. Shop Around
At last, you’re ready to go into the car-buying phase of this. First, you want to clarify what you want in a car. Naturally, you want a reliable car to get you around, but you need to determine up front if a brand new car fits that criteria. It may be that a good used car will fit what you need.
In the same vein, you’ll want to check out Consumer Reports to find out the value of the cars you’re looking at. You want to make sure that you’re not overpaying for a car you’ve been eyeing on the car lot.
Additionally, as you’re scouting around for cars, you should be scouting around for lenders. A good number of traditional banks won’t finance you, though you may have better luck with a credit union if you opt to go that route. However, even if the credit union is an option, you may still want to look at an institution that offers bad credit car loans.
Some of these lenders unnecessarily get a bad rap. This reputation often isn’t warranted, especially given the fact that many are in the business because they want to help people get into a car and to re-establish their credit. They are willing to take the risk on someone with bad credit and can be a good option for people who have felt beat up by their financial situation. This can be especially true for people who have had to file for bankruptcy due to medical reasons.
Once you do find a lender, try to get prequalified for a loan with that lender or lenders. Also try to keep your inquiries limited to one day. This will limit the number of hits that your credit will take in a day. When your credit score is already suffering, little details like this can make a difference.
5. Other Things to Consider
If you’re at the point where you’re ready to shop for a new car, keep a few things in mind. If you’re still having trouble getting financing, think about asking someone to cosign for you. This allows you to get into a car with the help of someone who has better credit than you.
Additionally, it probably goes without saying but you should always pay your payments on time. If you’re on a loan with a cosigner, it’ll salvage your relationship. And even if you’re not, it will eventually salvage your credit.
Either scenario will set you up for what comes next. That is to say that after making faithful payments for six months to a year, you can look at refinancing. This will get you out of a high-interest or variable interest rate loan. It’ll allow you to possibly release your cosigner from the deal. And it will bolster your credit score.
Lastly, make sure you read the fine print in your loan paperwork. This is where you’ll see your terms of agreement, your interest rate, etc. Even if you have to get a bad credit auto loan, you can still try to get the best rate. Knowing what you’re signing yourself up for will help you greatly in this regard.