Buying a Car with Bad Credit
Everyone loves to talk about credit scores, those three numbers that seem to control every aspect of your life. Want to buy a house? Sorry, your credit score sucks. A car? Good luck finding a bank to give you a loan, but maybe you could work something out with the thieves down at the dealership. At times, it seems so hopeless, a system that was just made up by rich people to ensure that money equals power. There may be more truth to that than they would have you believe, but the good news for those of you with bad credit is that you have more mobility within the system than you think. These tips are geared specifically toward buying a car with bad credit, but their lessons can be applied elsewhere as well, repairing your credit (with a little patience) and helping to secure a better financial future.
If your credit score is somewhere below 620, you are considered “subprime,” and you will probably have some difficulty finding a loan with the most reasonable rates. However, you can still apply for a Subprime Loan – just be prepared to make up the costs with a higher interest rate or a higher down payment. Getting a loan with bad credit is going to be an exercise in compromise – settle on a cheaper car than the one you want, settle for a loan with worse terms than a prime loan. If you do your time, it will pay off in the long run.
Don’t limit yourself by only looking at subprime lenders, though. Many “prime lenders” have other subprime loan products, or may have subprime affiliates. Start your search at a bank with which you already have account histories, and remember that 620 is a guideline, not a rule – what one institution considers subprime, another may not. By shopping exclusively with subprime lenders, you’re not allowing for the possibility of a better deal.
A credit union is different from a bank in that they are non-profit financial cooperatives. As such, you won’t be allowed to apply for a loan at one until you sign on as a member. This membership is based on a “common bond” with the other members, and can be as simple as living in the same area. The basic structure of a credit union is that the community pools their savings to be able to offer loans to other members of that community. Because it is not for profit, these institutions usually offer much more competitive rates than banks, and because they have an interest in the community, your credit score may be of less concern.
The catch is that in order to qualify for a loan, borrowers typically have to meet certain savings requirements. If you already have an account with a credit union, great! You should definitely make that your first stop when shopping for a loan. If not, consider opening one well before you start shopping for a car – setting aside even a little bit each month can go a long way toward repairing your credit AND providing for future financial security.
When you get someone to cosign a loan, that person is basically lending their good credit history to your application. In doing so, they make a promise to the lender that, if you fail to repay the money, they will take your debt. As you can imagine, it’s not something you ask lightly of someone. However, it can be an excellent way to get a better loan, while also rebuilding your own credit. If you know someone who both has good credit and trusts you, it is definitely worth considering.
It is always a delicate matter, asking someone for money – which is essentially what you’re doing – so think about asking someone to cosign for you in the same way you think about applying for the actual loan itself. If you can sit down and budget yourself, and make some sort of presentation for your potential cosigner that goes over exactly how you plan to repay the money, it can go a long way toward securing a loan. Plus it helps you, too! Having your finances organized and laid out in front of you will let you see better what you can actually afford, which is crucial to the car buying process, and can also help you avoid being saddled with a debt you can’t repay.
If you’re scared off by the idea of higher rates on a loan because of your credit score, don’t be: As you pay down that loan, you’re building your credit score. As that number rises, so does your negotiating power. After you’ve established a good payment history, you can renegotiate the terms of your loan, to allow for a lower interest rate or lower monthly payments. You’re saving money, plus making it easier to get any future loans!
Verify Your Credit Report
Your credit score is based on information about you that has been collected by the big three credit reporting bureaus. These are huge, faceless entities that process an enormous amount of data every day, and mistakes do get made. If you’re about to enter any situation that relies on your credit score, be it for a loan or otherwise, it may be worth it to verify that everything being reported about you is correct. You don’t want to be held responsible for someone else’s debt just because some office worker made a typo! If you do discover any errors in your credit report, there are very strict legal guidelines dictating how long the credit bureaus have to correct them. So check your credit score – it’s worth a look, and could bump you up a few notches. Keep in mind, though, that it can take up to six months for the changes to show up – so start the process well before you need to. Think of it as time to save money for a down payment!
Have Realistic Expectations
If your credit isn’t great, you shouldn’t be looking at expensive, top-of-the-line vehicles. If you borrow more than you can repay, you’re only going to dig yourself deeper. Plan a budget, and expect higher interest rates. Pay more attention to what you need than to what you want – if you spend less money now on a car that’s just good enough to get you where you need to go, you can spend more on something fancier a few years down the line.
Save for a Down Payment
How much you can afford to spend on a down payment greatly affects the terms of a loan. The more you can save up initially, the less you’ll have to pay off later, both in terms of the principle and the interest; even the interest rates. Also, if you start to save, and find it’s not too painful, you may be surprised by how easy it is to save up enough for a car without ever having to step foot in a bank.