Cars can be very expensive to purchase, which means that auto loans are commonly used to help you pay. Bad credit keeps many from being able to buy a car because they are unable to get a loan. However, having bad credit shouldn’t keep you from taking out a car loan, you just have to know how to do it.
The Importance of Your Credit Score
Credit scores, in general, can be difficult to understand. A bad credit score tells a lender that you would be a risky investment, which is what makes it more difficult to find institutions willing to give you a loan. Some institutions may still be willing to give you a car loan, but you should expect much higher interest rates. For example, a good credit score might give you a 4% annual interest rate for a $20,000 loan while having bad credit might give you an 18% annual interest rate for the same loan. Because of how long loan terms can be, you will end up paying significantly more money if you have poor credit.
Do Your Research
You won’t be able to get interest rates that are as good as those who have good credit, no matter which financial institution you use. Banks will give you higher interest, but dealerships especially will try to take advantage of this. Beware of dealerships that offer loans to anyone, regardless of their credit score. Dealerships have been known to offer loans with interest rates that are right at the legal upper limit for interest rates. Having bad credit can make finding a decent loan dangerous, so make sure to do your research and find the lowest interest rates available.
Even if you understand what interest rates to expect, you still need to get approved for the loan. While some institutions will likely approve your loan, they may need some convincing. Here is a quick list of things to have with you to make sure you are the most prepared:
- A pay stub from work: This lets the bank know that you have a stable income.
- A utility bill: This is important for letting the bank know you pay monthly bills on time
- Personal references: The bank isn’t purchasing the car, they are investing in you. Find references that let the bank know you have income, you pay bills, you are reliable and trustworthy — anything to convince them why they should give you a loan.
Improve Your Credit Score
The best way to increase your chances of getting a loan is to begin improving your credit score. Even if you find a loan while having bad credit, improving your credit should be your ultimate goal so that you will be able to get a better loan next time you need a car. Business Insider has a detailed guide for how to improve your credit score.