You realize a need for a car to drive, but your bad credit history is poses a challenge. But are you even able to get auto financing with bad credit? The answer is likely yes, though you will need to do some extra work before, during, and after you get the vehicle loan to make sure that getting financing is a beneficial long-term step.
The auto lending industry is established on trust. Lenders trust borrowers with excellent credit to repay their loans on time more than they trust borrowers with bad credit to do so. That high risk is priced into auto loans in the form of higher interest rates plus terms that are more restrictive. If you are battling a bad credit, vehicle finance rates will probably be higher than if you own good credit.
If you have bad credit, “you’ likely not going to get the lowest rate possible,” says Joe Pendergast, Navy Federal Credit Union’s vice president of consumer lending.
Researching into your credit history can assist you secure the most affordable vehicle financing. Your goal is to know where any issues lie, how you can repair your credit score, and how much you can genuinely afford to spend for a new car. You will then want to shop for the lowest price of financing by applying to several lenders, getting preapproved offers before you decide on heading to the dealership.
Unfortunately, some bad lenders prey on consumers with lousy credit. It is vital to know how to identify and avoid lenders and tactics that will just make already poor credit even worse.
The moment you have received auto financing, there are things you can do to make the vehicle loan a stepping-stone to better credit.
What Is actually Bad Credit?
When you applying for an auto loan, your credit score is one of the many critical factors that lenders take into consideration. A credit score is a three-digit number ranging from 300 to 850 points, and it’s dependent on the information in your credit reports. It takes into account your history of paying your bills and loans on time, the amount of credit you have, how much credit you are using, and the number of inquiries for new credit you are making.
Your credit reports are produced by three major credit reporting agencies: Equifax, Experian, and TransUnion.
There are many credit scoring models offered, and different lenders use different models. One of the more common is the FICO scoring model. It uses the range of credit scores (300 to 850 points) and breaks it down into smaller categories. FICO defines very poor credit as a score between 300 and 579, according to Experian, while a score from 580 to 669 is considered fair credit. Both the very poor and fair ranges enter into a category refered to as “subprime.” Some lenders refer to the lower tier as “deep subprime.”
Loan companies see applicants with scores in the 670 to 739 range to have good credit risks. Those with a score higher than 740 are regarded as excellent credit risks. They are usually offered the best vehicle loan terms and are qualified to get special lease incentives and financing from automakers.
There also exist other factors besides your credit score that impact your creditworthiness. Lenders equally consider your employment history, your capacity to repay the auto loan depending on your monthly income, and the value of the collateral you are putting up for the vehicle loan. The car is usually the secured collateral with an auto loan, and the lender has all right to take it back or “repossess” it if you do not make your payments.