Four ways that bad credit can affect your auto loan
Your auto loan can be affected by bad credit in many ways. These are the four possible ways that bad credit could affect your next auto loan. There are also some solutions and you just have find the best ones.
1. You may not be eligible
Lenders may be cautious about granting an auto loan to a borrower with bad credit. Although there is no minimum credit score that will get you approved for financing, a higher credit score means you are more likely to be able to pay back a car loan. Lenders might refuse to approve you if your credit score is not good enough. Sometimes, they will require that you bring in someone with a higher credit score.
Getting a cosigner could be the solution to your car buying blues when you have a low credit score. Cosigners agree to pay the loan on time if you miss or fall behind. They also lend their credit score to you so that you meet lender requirements.
A cosigner must have a credit score that is at least 660. A cosigner also needs to meet all the lending requirements that you do when being approved for a car loan since they have to prove they can repay it if you can’t. This provides a lender with peace of mind, and can increase your chances of getting an auto loan for poor credit.
2. You may qualify for higher interest rates
The biggest problem with car loans is the fact that the higher your credit score, the higher the interest rate is likely to be. Bad credit can make auto loans more costly (interest is the cost to borrow the money). Your credit score is the most important factor determining your eligibility for an interest rate.
Solution: Make a larger down payment
You can offset higher interest rates by borrowing less. The more money you can bring in as a down payment, either in cash, trade-in equity, or a combination of both, the more likely you are to pay less on your loan overall. You may be able to reduce your loan amount enough to qualify for a lower rate of interest depending on how much you have to pay upfront.
3. You may have fewer vehicles to choose from
Subprime lenders will typically approve you for financing before you can choose a vehicle. This is almost the exact opposite of what happens when you have good credit and work with direct lenders. Good credit allows you to buy a car from any seller without worrying about financing.
However, bad credit borrowers don’t often start with car selection. You will need to locate the right lender to work with in this situation, which is usually done through a special finance dealer. Once you have been approved for financing, the lender will send a payment call to the dealer, informing them that they can finance your vehicle up to a set monthly payment amount.
The dealer will then select a range of vehicles that fit your budget. You will need to choose from dealer stock and only shop within your means.
Solution: Apply for pre-approval
Even though it may be easier to find an auto loan through a special finance dealership when you’re struggling with credit issues, preapproval with poor credit isn’t unheard of. A long-standing credit union or bank account can help you get a car loan. Credit unions are more favorable for bad credit borrowers because they are not-for profit organizations and can often pass on savings to their members.
4. Traditional Lenders Impact Loan Chance
Preapproval for poor credit can be possible under certain circumstances. However, it may still prove difficult to obtain if your credit rating is lower than average. Bad credit can make it difficult to get auto loans from traditional lenders like banks, credit unions and online lenders. To be eligible for financing, most financial institutions will require a credit score of at least 660.
Solution: Find a subprime lender.
There are lenders that are prepared to work with borrowers who are in tough credit situations, though, called subprime lenders. To determine if you are a good candidate for an auto loan, these lenders consider more than your credit score. There are not all dealers that work with lenders who can finance bad credit borrowers. It is important to know where you can find help.
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When you have bad credit and need an auto loan, it can be difficult to know where to go. We can help you. We’ve got you covered! Fill out the fast. Get started now on your next auto loan!
Even better news? A bad credit car loan can help build credit. Your credit score will improve over the loan term. If you have enough credit, you might not need our assistance or a bad credit loan the next time. Don’t wait! Get started today on your next auto loan!