Financing a car can be both an exciting and stressful process. For many, it’s the first major purchase they make in their life. With the disruption many faced these past two years, credit scores are at an all-time low. And having a bad credit score can make it even more difficult to get proper financing.
Today I want to share with you the following seven tips to help finance a car even with a low credit score.
7 Tips to getting Car Financing With a Bad Credit Score
When buying a new or used car, lenders will typically pull your credit report and verify your income by requiring a paycheck stub or bank statement.
1. Get a Co-signer
The easiest way for anyone with bad credit to finance a new car is to have someone co-sign with him or her.
A co-signer is a close friend or family member with good credit who will agree to apply for the loan with you. The lender will use the co-signer’s credit score and income to approve the loan. Keep in mind, if you fall behind on payments, your co-signer is on the hook and will be responsible for your loan.
If you are unable to pay, it could damage not only their good credit but perhaps your relationship with them as well.
2. Quickly Increase Your Score as Much as Possible
If you aren’t using a co-signer and have to secure the loan on your own, it’s best first to try to clean up your credit as much as you can.
Before you apply for the loan, check your credit and, if possible, take care of any delinquencies.
- Pay off credit cards-
- Pay down as much revolving credit as possible- FICO recommends keeping revolving balances below 30% utilization. If you can do that, that will help your odds for approval.
- Write dispute letters on delinquent accounts
- Make arrangements with collection agencies to pay off delinquent debts-
3. Experian Boost
Another way to raise your score may be to use Experian Boost. Experian is one of the three credit reporting agencies, and their Boost product usually helps people with bad or new credit raise their scores, sometimes significantly.
You can sign up on their website, link your bank account, and Experian will use regular payments for utility bills and rent as positive accounts on your credit report.
According to Experian; “The average Boost user sees an average increase of 12 points to their FICO Score. And those with poorer credit often see a higher increase.”
Keep in mind that this will only raise your score if your potential lender pulls your Experian report; your TransUnion and Equifax score will remain unaffected.
4. Be Prepared to Explain Delinquencies
While most underwriting is done with a computer algorithm, manual underwriting is still frequently used for car loans, especially when applied for at the dealership instead of a bank.
Manual underwriting is a human touch that the lender will use to increase their confidence in you enough to approve you for the loan.
An underwriter will usually call you and ask about each delinquency on your credit report. You may be aware that paying a past collection often will not raise your score, but having it show up as “paid” may save you if your lender uses manual underwriting.
If you can explain honestly and with sincerity what caused your past credit problems and the concrete steps you have taken to rectify things, you may very well qualify for a loan.
5. Increase Your Down Payment
Having a sizeable down payment will usually be necessary for getting approved with bad credit.
You may have to balance this with paying down your revolving debt. If you can get your credit card balances under 30% utilization, you should consider that first.
6. Dealers Are Better Than Banks
Dealerships will be more likely to work with you if you have credit issues than a bank. Since dealers don’t want to miss out on the sale of the car and the loan, they will often work with lenders who specialize in subprime auto loans.
A dealership’s financing department will quickly tell you whether or not you will be able to get approved, and if not, the steps you can take to ensure you get approved next time.
It is best to tell them of any possible credit issues before pulling your score. Having a candid and honest conversation with them first will cut down on unnecessary hard inquiries, shaving a few points off your score.
7. Use a Buy Here/Pay Here Dealerships (BH/PH)
A “Buy Here/Pay Here” dealership will likely be your last option. BH/PH dealerships exclusively work with car buyers who face significant credit issues.
Often, these dealers will not even check credit scores. They will only ask for proof of income, such as a paycheck stub. Typically, the payment isn’t due monthly like a regular loan but is due whenever your payday is, perhaps weekly or biweekly.
These lenders ensure they get paid by requiring automatic deductions of your payment from your checking account the day after your direct deposit hits.
One drawback of using a BH/PH dealership is that the interest rates are typically extremely high, sometimes even predatory. Unless buying a car is anything but an absolute necessity, you would probably be wise to clean up your credit and save for a down payment while taking public transportation for a few months.
Conclusion
Regardless of how you acquire the loan, after six months or so of on-time payments, your credit score will likely rise enough for you to refinance through a different bank for better rates successfully.
Big commercial banks such as Citi and Bank of America and many local banks and credit unions have easy to apply for online car refinance options.
The process is usually simple and often done right from their website. Doing this will save a few dollars in monthly interest payments.
