Bad Credit Car Loans 

The inexperience of youth, poor financial advice, unexpected loss of employment, or any number of other factors can leave good person in need of a bad credit car loan. If you’re here, you probably need an auto loan and your credit score isn’t that great. The good news is we can help you by recommending some options, but continue to help yourself by taking the proper steps to boost your credit score.

Understanding How Your Bad Credit Affects Your Car Loan

A poor credit score rating is always going to translate to a larger monthly payment on any approved auto loan. Lenders charge a higher interest rate to those with a lower credit score in order to offset their high default rates. The more money they make upfront from those interest payments will help to minimize their loss in the event that the borrower stops paying and the lender is stuck owing the remainder of the principal loan balance on the automobile. The higher the risk for the bank, the higher the monthly payment for the borrower. This is especially true for bad-credit auto loans.

The following table will give you a better understanding of how a lower credit score translates to higher interest rates (Annual Percentage Rate) and higher monthly car payments:

*based on a 60-month, $20,000 auto loan at current national average rates

As you can see, your credit rating can drastically alter the APR on any approved auto loan, either increasing or decreasing your monthly cost and lifetime interest payment.

To gain a better understanding of your credit score and how it can affect things like your auto loan’s APR.

How to Shop for Car Loans When You Have Bad Credit

Buying a car is a chore few people relish. While everyone likes a set of shiny new wheels, bargaining with dealers makes even shoppers with top-notch credit uncomfortable.

If you have bad credit, it’s even more important to be prepared. Here are some shopping tips specifically for buyers who need car loans for bad credit:

Before Going to a Dealership

There are a number of steps you can take to prepare for your auto purchase and subsequent loan application that will ensure the best financial decision and a smooth transaction. Here’s a breakdown of some of those things you should think about and do before ever stepping foot in a car dealership:

Tip #1: Determine your exact vehicle needs

Because you can expect to pay a much higher APR with a bad-credit auto loan, you don’t want to purchase an automobile that is either larger or includes more amenities than is absolutely necessary for your day to day travel. Both of these things tend to lead to higher costs. And conversely, if you have a large family, or if your job requires you to transport goods or supplies, you need to make sure that you don’t purchase a vehicle that is less than what you need. Things like gas mileage, total daily commute, and expected routine maintenance should also factor in to your planning. You know your personal transportation needs more than anyone else. Determining the exact nature of them before you head to the dealership will help ensure that you aren’t pressured into a purchase that would only worsen your financial situation.

Tip #2: Set a budget

A budget should be at the forefront of your planning when making any large purchase, especially one involving long-term financing and monthly payments. Calculate an estimate of those payments and figure out exactly how much you can afford to spend on a vehicle. Check dealer websites, auto buying magazines, newspapers, and any other available resources to get a better idea of the true cost and market value of your desired vehicle. This will help you make sure that you don’t overpay. A window sticker may seem like a good deal when you first walk onto the lot, but a little bit of research could easily prove that it isn’t.

It’s also a good idea to examine costs at different term lengths. You’ll notice that the longer the contract, the smaller the monthly payments. However, because of the continued interest payments, you will pay more in the long run. Many bad-credit car loans are 24-36 month terms, as opposed to the more traditional 48-60. Again, this is to reduce the risk for the lender by collecting more upfront in the event of a potential default. Make sure to factor in the potential for a smaller loan term when making your budget.

Also remember that many states mandate auto insurance, as do many lenders, so that’s another amount you’ll need to factor into the monthly costs associated with your auto loan. It’s a good idea to get an insurance price quote as a part of your vehicle budget planning.

Tip #3: Know what’s on your credit report

You should make it a habit to consistently monitor your own credit report, as it’s very important to know what’s in it long before ever walking into a car dealership or applying for an auto loan. Each of the three major credit bureaus are required by law to provide you with a free copy of your credit report once per year. To get your copy, you should go directly to the industry’s AnnualCreditReport.com website. And as with anything on the internet, beware of imitators with similar URLs. Never pay for your free credit report.

If you’ve already obtained your free copy for the year, you can purchase another one from any of the three major bureaus. To avoid any potential scams, it’s best to contact them directly. You can do so at:

Equifax Credit Information Services

Experian

TransUnion Corporation

You can use the information on this report to better estimate the terms of any bad-credit auto loan you may be approved for, and then plan accordingly.

Buying the Automobile

After you’ve done all your planning and research, you’re ready to put it all to use. Here are some things to keep in mind as you make your purchase:

Tip #4: Don’t move out of your price range

Any little bit extra tacked on to what you were planning to pay could end up costing a lot in the end as it will grow exponentially along with those interest payments, especially with the higher rates of a bad credit car loan. You went through the work of making your budget. Stick to it.

Tip #5: Don’t be afraid to negotiate

It can seem like an intimidating proposition to some, but if you did the research, you already should know both what a car is worth and what you’re willing (and able) to pay. If the vehicle you need is out of your price range, do what you can to get it in your range. If it’s already in your range, try to get it lower if your research justifies it. Any little bit now can save you a lot in the long run. Because of your bad credit score, you most likely won’t be able to negotiate the terms of your auto loan, but you can always try with the purchase price.

Tip #6: Be careful with add-on products and services

Oftentimes, after you’ve already shaken hands and agreed to a purchase price and loan terms, you will be offered additional products and services before you sign a contract. Most likely, these were not included in the price quoted. If you agree to any of them, the cost will be added onto the previously-agreed cost of the car, which means it raises the amount of your financing. And because of the higher interest rates associated with that bad-credit auto loan, those products or services could significantly increase the cost of your monthly payments. Know the value of these services and whether they fit into your original budget before agreeing to any of them.

Tip #7: Read the contract. Ask questions

It’s conventional wisdom that is too often unheeded. Don’t sign anything until you read it. You know your financial situation and your needs better than anyone. And at this point, you should have done your research. If you are unsure of something or have any questions, ask. And if you don’t feel comfortable for any reason, don’t sign. Once you sign the contract on the auto loan, you are legally obligated to it.

After the Purchase

After your bad-credit auto loan has been approved and your car has been purchased, there are plenty of things you’ll want to do and remember.

Tip #8: Keep a copy of your contract

Just as important as reading the auto loan contract before signing it is keeping a copy after. Make sure to get your copy, with all signatures and details filled in, before leaving the dealership. Don’t trust that they’ll arrive safely to you in the mail. After you do obtain your copy, make sure to keep it in a safe place in the event that you need to refer to it in the future.

Tip #9: Don’t miss a payment

Chances are that if you’re the recipient of a bad credit car loan, you already understand the negative effects of late or missed payments. Setting up automatic payments is the best way to ensure that you pay your auto loan on time, and paying more than the minimum payment will help to decrease your total interest in the long run.

And if you’re having trouble making the minimum payments, it’s better to try to negotiate an alternative payment with the lender than not pay at all. Contact your lender as soon as you think you might be late with a payment. You’d be surprised how many are willing to work with you in that regard. Remember, because you’re already a high-risk loan for the creditor, they may be quicker to repossess the vehicle if you miss even a single payment. And in some states, they can repossess without ever having to go to court.

How I Picked the Best Bad Credit Auto Loans

If you have bad credit, it’s not as simple to find an auto loan with a low rate as it is for others. For that reason, I considered many other factors in my recommendations, which I’ll detail farther down.

However, even if your credit isn’t great, make sure you include local banks and credit unions in your search. There is a lot of competition for car loans at every credit level, and you may be able to find competitive rates just a mile or two from your door.

Be sure to check out credit unions in particular. Though the application process may be more involved, they may have more flexible lending criteria than banks. And if you have a long-standing relationship with your own bank, they may have a better idea of your ability to repay a loan than other lenders.

I did not look at manufacturer-specific lenders such as Ford Credit or Honda Financial Services. If your credit is poor, you may not have the luxury of looking for one specific make of car.

The best bad-credit auto loan lenders and servicers provide:

Terms You Need to Know When Financing Through a Bad-Credit Car Loan

Again, you’ll want to read any contract completely before you sign it. In order to help you understand that legalese, we’ve provided a list of common finance terms that you’ll come across before, during, and after signing for your auto loan.

Common Car-Buying Scams

Having bad credit may make you feel like you’re in a vulnerable position when you’re buying a car. Unfortunately, your fears aren’t totally unfounded: Some unscrupulous car dealers try to squeeze more money out of buyers they sense are uninformed, desperate, or both.

The best guard against this is to educate yourself. There are dozens of car-buying scams out there, but here are a few of the most common you should watch out for when you have bad credit.

1. Yo-yo loans

Yo-yo loans are typically a problem for those with shaky credit who don’t (or can’t) get preapproved for a loan before going to the dealer. The dealer lets you take possession of the car even though your financing isn’t final.

You may think you have closed on a loan — until the dealer calls days or weeks later to tell you your financing fell through. Then you’re pressured to take a less-favorable deal in order to keep the car from being repossessed.

Your first line of defense against yo-yo loans is getting pre-approved before you go to the dealer. If you’re relying on dealer financing, demand to see the loan approval documents before you drive away. If they assure you that it’s OK to take possession of the car even if your loan isn’t final, stand firm. Refuse to take the car until you see proof that your financing has been approved.

2. Co-signer ‘straw purchase’ scams

Your dealer may pressure you to get a co-signer, saying you can qualify for a much lower interest rate on your loan and improve your own credit score if your co-signer has a great credit history. That may be true, but you’d first need to decide whether you want to risk your relationship with a co-signer if you can’t pay back the car loan, leaving them on the hook.

Some dealers may take this high-pressure tactic and make it a scam by confusing you and your co-signer during loan paperwork. You’ll walk out of the finance office thinking you co-signed on the loan, but weeks later, you may learn that the loan is only in your co-signer’s name — and yours is nowhere to be found.

To help avoid this scam, make sure you never feel rushed when you’re going over paperwork. Read the documents you’re signing, and in the case of co-signing, make sure you’re signing the same contract — not separate contracts.

3. The ‘as-is’ car that’s actually a lemon

Perhaps you’re checking out used cars — a common scenario if you have bad credit — and you see one with a tantalizingly low sticker price. The federally required buyer’s guide says it is “AS IS – NO WARRANTY,” but the dealer assures you this is routine and there are no problems with the car. You buy the car and it breaks down almost immediately, or you later find out that it was wrecked or flooded when servicing it or running the report you should have seen before buying.

Think twice before buying a used car if you don’t know its history. Checking the car’s title is a good first step, but it won’t always help if the title has been washed — that is, altered to remove evidence that a car has been salvaged. Strongly consider investing in a vehicle-history report from CARFAX or a similar provider to help protect yourself.

4. Refusal of online financing

Perhaps you’ve done your research and gotten preapproved for financing up to a certain amount for a certain APR through an online lender. In theory, this should smooth the car-buying process — you already have financing.

But the dealer may tell you they’ve had lousy luck with online lenders bouncing checks, and therefore can’t accept the financing. The dealer will, however, be more than happy to offer you their own financing — more than likely at a much higher APR than the one you’ve secured.

If you’re faced with a dealer who won’t accept your pre-approved financing, walk away. The only time you should use the dealer’s loan instead of the one you’ve already gotten is when the terms are better, not worse.

Starting Your Search for Bad Credit Auto Loans

Remember, even though bad credit will exclude you from prime interest rates, it won’t shut you out of the car-loan game entirely. It’s far easier to get decent auto loans for bad credit than mortgages or other large loans, so you’ll still have a good number of options.

The lenders I profiled above are worth checking out, but remember not to overlook your existing bank and local credit unions. You have nothing to gain and everything to lose by assuming a lender won’t work with you. Our top picks above, Auto Credit Express, Capital One, and MyAutoLoan.com are worth a look for starters.

Once you’ve secured a loan for your car, remember to insure your investment. Check out our guides on How to Get Cheap Car Insurance in 2018 and the Best Car Insurance Companies in 2018 to start your search.

We also have more help to offer consumers with bad credit. If you need a loan for reasons other than car-buying, check out our guide to the Best Bad Credit Loans for 2018. And if you’re looking for a credit card, we offer recommendations in our guide to the Best Credit Cards for Bad Credit.

Finally, if your bad credit is symptomatic of deeper debt problems, you may also want to check out our series on debt management: the Best Debt Management Companies for 2018, the Best Debt Settlement Companies for 2018, and the Best Debt Consolidation Loans for 2018. Article Wrote By S A U ND RA LAton

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