There are many different ways to buy a car, but one of the most common is obviously through an auto loan. Can you get an auto loan with bad or mediocre credit? It's not impossible.
Lenders, often just referred to as banks, consider various factors when lending money for a vehicle, and one of those factors is your credit score. Going by the FICO credit score model, which has a range of 300 to 850, anything below 670 is not ideal to qualify for a good-credit or prime auto loan. However, there are some steps you can take to figure out how the banks will look at you.
Step 1 – Look At Your Credit Report
Knowing where you stand is half the battle. Pull your own credit report before applying for a loan. Find out what your score is and if there are items on your report that you can contest or get removed. If your score is low, and you don't need a new vehicle immediately, you can take steps to improve your score before trying to get a loan.
Step 2 – Find Out If It's Possible To Improve Your Score
There are some fairly simple ways to improve your credit score over a short amount of time. There are two main ways to improve your score:
– Improve your payment history
– Improve your debt to credit limit ratio
For example, if you have late payments or items in collection, you can take care of those by paying them off. In the second area, the key is to reduce how much debt you have in comparison with your credit limit. For example, if your credit limit across all accounts is $15,000 and you owe $14,000, that's a big negative for your credit score. Lenders prefer to see less than 30 percent of your credit limit used up.
The other thing you might check on your credit report is errors. Mistakes sometimes happen and can negatively affect your score.
Step 3 – Do Your Research
Without an ideal credit score, your options for conventional lenders are reduced considerably. Instead, you'll likely need to look for lenders who specifically do loans for those with less than ideal credit scores. These loans typically make up for the risk of lending to low credit borrowers by tacking on higher interest rates. Many car dealerships work with these types of lenders in order to give buyers more options to get into a new vehicle. These loans are known as subprime auto loans. More about that in a moment.
Step 4 – Consider Your Down Payment
Down payments are generally important to have anyway, but they are even more important if you have bad to fair credit. The down payment can lower your monthly auto loan payment, and it can also prove to the lender that you have money to make your payments on time.
Step 5 – Know What You Can Afford
Again, this is important in any car-buying situation, but it's even more important when you have limited resources. First, find out what amount of monthly payment that you can afford. Second, figure out what interest rate you'll likely be looking at and plug it into an auto loan calculator. This allows you to see what total price you can afford on a car.
Step 6 – Be On Your Best Credit Behavior
If an auto loan is in your near future, then you need to be cautious of how you treat your credit leading up to it. Don't apply for new credit cards or lines of credit, and don't allow any late or missed payments to hit your report.
If you need a new vehicle as soon as possible and are unable to improve your credit score enough to qualify for a conventional prime loan, then an unconventional auto loan might be your best bet. Let's take a look at what that is and how to get one.
Subprime Auto Loans Explained
A below-prime auto loan is often the only option for buyers with bad to fair credit. The below-prime designation refers to credit scores below 670 as previously mentioned. People with these scores often have negative items on their reports and a history of missed or late payments. They may also have a high credit utilization ratio. Lenders consider these borrowers to be high risk. In order to offset this risk, unconventional lenders add three mitigating factors:
– High-interest rates
– Extra loan fees
– Prepayment penalties
There are obviously many reasons why otherwise responsible people end up with bad credit scores. If you have such a score, you might wonder why your good job or income doesn't make up for it. The fact is that bad credit gives lenders the concern that you might miss payments or stop paying on it completely.
When Does A Subprime Loan Come Into Play?
This type of loan comes into play when you are unable to qualify for a conventional loan. Credit history is typically the biggest reason why you might need an unconventional auto loan.
If your credit score is below 670, or your credit history is very recent or non-existent, you will generally have a hard time trying to get a conventional car loan. Credit history is probably the single most important factor in getting an auto loan.
The other reason you might have to seek out an unconventional loan is your employment history. If you are self-employed, or your income comes from sources other than a steady job, you might need an unconventional loan. Even though all auto lenders want to make sure that you have a good income, unconventional lenders are more likely to be flexible.
Your general financial health is another factor in getting a loan. If you have a past bankruptcy or unpaid tax liens, your options for auto loans are going to be more limited.
What Are the Features of Below-Prime Loans?
These types of loans are mainly characterized by their higher interest rates. These rates can be around three times the rate of a conventional loan. They may require a bigger down payment amount, which reduces the amount financed. They may also have a lengthy loan term, which reduces monthly payments but also results in a higher final amount at the end of the loan. Various penalty fees also apply, and lenders may be less tolerant of late payments.
How To Get An Unconventional Car Loan
If you need an auto loan and your credit history won't allow you to get a conventional loan, then it's important to know how to get an unconventional loan the right away. To start, make sure that you look at well-known lenders and full-spectrum lenders. A good lender will have experience in working with all types of credit histories, including those with previous bankruptcies or repossessions.
Believe it or not, there are also benefits to getting a loan like this when your credit history is not ideal. For one, it's a secured debt, which has more impact on your credit score than unsecured debt like a credit card. That means if you make timely payments, your credit score will go up. Being approved for a below-prime loan does not lower your credit score either.
If you need a reliable car, but don't have the cash to pay upfront or the credit history to get a prime loan, unconventional loans are worth considering.