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How to Get a Car Loan With Bad Credit

Posted by Auto.com Staff | Jan 3, 2019

Car-buying can be stressful for anyone, but it can be especially stressful if you have bad credit. However, you should know that it is possible to get an auto loan even if you have a bad credit score. By sorting out a budget, doing your research and making some smart decisions, you should be able to finance a car even if you have poor credit.

The first thing you should do is get a copy of your credit report. The information on there is what lenders see when they run your credit history, so it is important to make sure that the information is correct. Also be sure there is nothing there that you did not already know about. Once you have an idea of what is on your credit report, you can take steps towards improving it.

The next thing you will want to do is figure out a budget. How much can you afford to spend on a monthly car loan payment? Knowing this, you can calculate the total car loan amount, including possible interest rates. Once you have a budget, you can start shopping around for potential lenders. There are lenders that specialize in financing cars for people with bad credit. A poor credit score will typically result in a higher interest rate, but there are ways to offset that.

If you haven’t already, you should start setting money aside to go towards the down payment on a car. It is recommended that you put 20% down for a new car, and 10% down for a used car. Remember that the more money you are able to put towards the down payment, the lower your monthly payments will be. A larger down payment at the time of purchase also means less risk on the auto loan lender’s part. This can offset a bad credit score and has the potential of getting you a lower interest rate. A vehicle trade-in can also offset the overall amount of the auto loan, which, in turn, can reduce your monthly payments.

Another option for getting a lower interest rate is to get someone with good credit to cosign on the auto loan. This is especially advantageous if you are young and have poor credit because you are just starting out with minimal credit history. Getting a trusted friend or family to cosign on the loan tells the lender that you are sharing the financial burden of a car loan with someone who has established good credit, so the lender is not taking as big of a risk. 

At the end of the day, auto loan lenders are just trying to reduce their risk. Credit scores are a way of quantifying risk. So, if you have bad credit, you just need to find ways of proving to them that you are less of a risk than your credit score says you are. Larger down payments, cosigners and even improving your debt-to-income ratio by taking on a side gig or second job can all accomplish that.

If you are still having trouble getting an auto loan, do not fret. Use this time to save what money you can and work on improving your credit score. You can start by paying off debts on time. Some utility companies will even report on-time payments to credit bureaus if you ask them to. Taking the time to save some money and improve your credit will help you get financing down the road.