How to Get an Auto Loan With Bad Credit

It is not impossible to get a bad credit auto loan. Most banks or lenders approve car loans even if you have a poor credit rating. Since the vehicle itself serves as the collateral for the debt, there is no minimum credit rating required for such loans.

The difficulty lies in managing payment for the premiums. Usually, loans made with bad credit scores have higher interest rates and less than favorable terms. Getting into unmanageable debt may further decrease your credit rating. Your goal should be to get a car loan with good payment terms, even with a low credit score.

Preparing to Take an Auto Loan on Poor Credit

Sound financial planning is the key to getting a car loan with manageable premiums. You need diligent preparation to avoid the burden of high monthly payments. Here’s how you can ensure loan approval for an amount that you can afford:

  • Set a Reasonable Budget – Set your budget before shopping around for a car or a loan. Assess your financial capacity. Start with your monthly income versus expenses. Find out how much more you can add to your monthly bills. This will serve as your baseline when assessing loan offers and shopping for cars.
  • Improve Your Credit – If you’re not in a rush to purchase a vehicle, take time to improve your credit rating. Get your credit report and review it for items you can contest, such as fully paid debts. Be consistent with paying your bills on time. Finally, pay off as much debt as possible before getting a new one. 
  • Get Preapproval – Talk to your bank or credit union and ask for preapproval. Your bank will check your credit history and your financial standing. After assessing these, they will send details of how much loan they can give and what terms they can offer. The preapproval will help you choose a car that is within budget. Later, you can also use it to haggle down the price from your dealer.

Shopping for Bad Credit Auto Loans

Convenience should not be your top consideration when getting an auto loan. Don’t choose the first lender that offers a loan despite your bad credit. Shop around and do your research thoroughly. There are different types of financing you can get. Here are some of them:

  • Dealer Financing – Your car dealer will offer you financing options. By going through this route, your dealership will process your application for you and send them to various lenders. Dealerships might offer incentives to make you choose their financing. Some may offer 0% monthly interest rates for a certain period, even with poor credit. The catch here is that you can’t choose who your loan provider will be.
  • Captive Lenders – Captive lenders are brand-specific financing. They only offer loans for a specific brand of vehicle. If you have loyalty for a particular auto brand, you might consider this type of financing. They offer low-interest rates on loans, often below market rates. If you have bad credit, it’s worth trying to find a captive lender who will consider your position. The only catch is that it narrows down your choices to the brand that they carry.
  • Banks or Credit Unions – With banks or credit unions, you can start the loan application process even if you haven’t shopped for a car. The advantage with banks is you have direct relations with your lender. It is in their interest to help you throughout the process of securing and paying the loan. Another advantage of bank or credit union loans is flexibility. When you get a loan from these institutions, you’re not limited to dealerships or brands. You can use the loan to finance private car purchases, second-hand deals, or even auctions.

Lowering Your Loan Payment

There are still a couple more ways to lower your loan payments, namely:

  • Save for a Larger Down Payment – If you’re not in a rush to get a car, you can save money for a larger down payment. The larger your initial cash out, the less debt you need for your vehicle. This may prompt your lender to offer lower interest rates, even with poor credit.
  • Cosign – If you have friends or family with good credit scores, you may ask them to cosign on your car loan. This will also lower your interest rates.

Diligent Planning Is Key

Securing your car loan even with poor credit isn’t easy but possible. The above-mentioned tips on getting an auto loan even with bad credit can make your monthly payments more manageable. Plan diligently, and you’ll have your brand-new car keys with low premiums to boot.