If you’ve got bad credit but you really need a new or used car you’re probably considering some sort of bad credit auto finance, so here are 8 things I’ve learned about auto finance for people with bad credit through my experience of having bad credit in the past.
There’s nothing wrong with using bad credit auto finance, but it’s not something you should go into lightly. You should only buy a car using bad credit auto finance if you really, really do need a car and you have no way of getting one without it. The best thing about this type of finance is it gets people on the road who really do need to be mobile for work, family or for other reasons, but there are drawbacks you must be aware of even before you apply for this type of finance.
Subjects I’m going to cover here include:
- What is bad credit?
- Do you really need a vehicle?
- Checking your credit before you apply
- Shop around like anyone else
- What vehicles can you get with bad credit finance?
- Cosigner or no cosigner?
- Types of bad credit auto finance
- Where to find bad credit auto finance
- Be careful of “buy here pay here” deals
- How much will bad credit auto finance cost?
What is bad credit?
We all like to think of ourselves as individuals, but when it comes to getting any sort of finance you really are little more than a number most of the time. That number is your credit score, which is effectively a rating of how large or small the risk is of you not being able to back a loan you want to take out. Of course, if you want to look at it in a more positive way, you could think of your credit score as being a rating of how good you’ve been with money in the past. Either way, your credit score is what decides whether or not a lender is going to accept your application, and how much they’re going to charge you in interest if they do approve.
You can have bad credit as a result of past failures in keeping up with payments such as loans, leases, rent or things like gas, electricity, mobile phone contracts, etc. Even if you’ve made all your payments but they’ve been late at times, it will have had a bearing on your credit rating. Other things that are taken into consideration by credit agencies when they give you a rating include state and federal tax liens, bankruptcy and any legal judgments that might have been given against you in the past.
The credit bureaus who compile the ratings will supply you with a copy of the information they hold on you if you request it. This allows you to check that the information held is correct and amend anything that isn’t, but it won’t tell you anything about your actual rating.
Credit bureaus use the information to calculate a rating called a FICO score, which stands for Fair Isaac Corporation, and is the name of the company that developed the software and algorithms used to arrive at your rating.
Your credit score will be a number somewhere between 300 and 850, and around 650 to 670 is considered to be about as low as you can go and still have what’s referred to as “good credit.” Anything much below 650 is where you are then considered to have bad credit.
It’s worth keeping in mind that different lenders look at potential borrowers differently, so, just because one lender won’t approve you it doesn’t mean the next one won’t. However, the lower your score, the lower the chance you’re going to get accepted, and the higher the interest rate will be if you are accepted.
Do you really need a vehicle?
Before you even consider looking for credit to buy a vehicle, the first thing you need to ask yourself is whether you actually need a vehicle in the first place. Taking out any sort of finance isn’t to be done lightly, but if you already have bad credit you need to be even more careful. A vehicle is a big investment for most people, regardless of their credit, but if you need to use finance to get a car it’s going to cost you more, especially if you have bad credit.
You might need a vehicle to do your job, you might genuinely need a car if you live a long way from where you work or where your kids go to school. Even in those circumstances, you need to ask yourself if you could get around some other way, such as someone else with a vehicle you can rely on for a lift or even getting a cab.
The convenience of having a car is great, but if you only really need the car for getting to and from work, calculate how much a cab or the bus would cost and compare that to how much buying and running a car will work out at. You might get a shock and find the convenience of a car isn’t worth the extra it might cost you.
Checking your credit before you apply
Before you go out to buy a car you’ll do plenty of research beforehand, won’t you? You’ll look at different brands, models, trim levels, features and price comparisons to make sure you’re getting the right vehicle and right deal. It should be the same with auto finance, and any other type of finance for that matter.
The first thing you need to know is what your credit score actually is and how bad it might be. This can be done quickly and easily online and in many cases, it won’t cost you a thing, and as well as finding out about your score you can also see full details of the information held on you. Always keep in mind that different sources may produce different FICO scores, which are based on factors the lenders each company supplies deem to be the most important.
Shop around like anyone else
Just because you have bad credit doesn’t make you a second class citizen, even though it might feel like it at times. When you are looking for bad credit auto finance you need to understand you are potentially a hugely lucrative source of profit for lenders, so you should shop around to get the best deal you possibly can just like anyone else would.
I don’t want to scare you, but we are dealing with the real world here. By shopping around different bad credit lenders you could save yourself as much interest on your loan as someone with good credit might pay in total. Shopping around will save you money, which you could use to buy a newer vehicle than you might have been able to afford otherwise, and that could mean less money spent on future on maintenance.
What vehicles can you get on bad credit finance?
Theoretically, you can buy any vehicle you want with bad credit auto finance. In reality, how bad your credit is will determine how much you can finance and the maximum length of the agreement, which will inevitably limit what you can buy.
It doesn’t matter whether you want a compact hatch, a midsize sedan, an SUV, a family minivan or a full-size pickup truck, you will be able to finance one with a bad credit auto loan. How new, expensive and upscale the model is you can get might be a different matter altogether though. If you need a pickup truck you probably won’t be getting a brand new GMC Sierra Denali, but you will be able to find something like a good used Ford F-150. Remember, you should need a vehicle to consider bad credit auto finance, not just want one because you like the idea.
Cosigner or no cosigner?
In some circumstances, getting someone to be a cosigner for your auto finance might be the only way you can get accepted. It can also be a good way of getting more affordable rates. But just like bad credit auto finance in the first place, asking someone to cosign an agreement with you is something you really need to think carefully about before doing it.
The whole point of a cosigner is having another person who the finance company can go to for the payments if you are unable to make them. Having a cosigner with good credit is the next best thing to having good credit yourself, and as long as you keep up with the payments there’s no problem. However, think very carefully about the fact they will be responsible for the entire debt if you default. That’s the kind of situation that can smash relationships, so you both need to go into such an agreement with your eyes extremely wide open.
If your credit is really, really bad, your debt-to-income ratio is too high, your income is variable or lower than the required minimum, getting a cosigner may be the only way you can get a bad credit auto loan.
Types of bad credit auto finance
Just as you can buy any sort of vehicle with bad credit auto finance, most of the types of finance those with good credit have available to choose from will still be available to you. The problem is they will cost you more for having bad credit, and some of the terms might be slightly different.
A lot of the time when you see finance advertised for those with bad or no credit history it will be a straight loan. You pay a deposit upfront (sometimes you might not need a deposit at all) and then repay the balance, plus interest, in monthly payments over a number of years. However, loans with balloon payments and even leases are also available for those with bad credit.
Where to find bad credit auto finance
You only have to do an online search and you’ll see just how many lenders there out there willing to fund a vehicle for those with bad credit. It can be a profitable business because of the obvious increased risk of lending to those with a poor credit history. A lot of car dealerships will make a big deal of offering finance for those with poor credit, but I’ll cover that in a little more detail in the next section.
As well as dealerships, you can obtain funding from banks, credit unions, finance companies and the Dealer Financial Services group (DFSG). It’s a good idea to start with the bank or local credit union where you have a checking and/or savings account as they are likely to be the most affordable sources, but don’t be surprised if it’s not a service they are prepared to offer.
Be careful of “buy here pay here” deals
Some auto dealers will run their own bad credit finance schemes, and by that, I mean these schemes are not run by the dealer on behalf of a bank or finance company. These schemes are often heavily advertised and usually called “buy here pay here” auto loans, and I think you should avoid them unless it really is the only way you can get a vehicle.
For a start, the dealership will see you as a captive, desperate audience, which could tempt them to inflate the price of the vehicles they offer under the scheme. On top of that, there may even be a device fitted to the vehicle you buy which will allow the dealer to immobilize it if you don’t make your payment in time. They’re perfectly within their rights to do this, of course, but is that really something you want hanging over you if there’s a mistake or something out of your control that causes you to miss a payment and leaves you stationary at the side of the road?
How much will bad credit auto finance cost?
It’s impossible to say what rate you’re going to be able to get, so you’ll only know when you try. Rates of 25% and much higher are commonplace, but you can also do much better than that if you shop around. As I said earlier, knowing your credit score will give you an idea of what to expect. If you’re in the 300s the rate is going to be high – potentially really high – but if you’re at 550 or above then you’re in a reasonably strong position for shopping lenders.
When it comes to those buy here pay here deals you probably won’t be given a rate – just a monthly payment. If you do find yourself having to consider such a deal, do some research online to find out what you’re really being asked to pay. Look for a vehicle for sale somewhere else that’s as close as possible to the one you’re being offered, and then divide that price by the number of monthly payments you’re going to be paying for the vehicle over. Let’s say you’re being asked for $350 per month for a vehicle on buy here pay here over 48 months and you can afford that amount. That’s a total of $16,800 over the four years. If you look online and find a very similar model for sale for $6,000 elsewhere, you know you’re being charged $10,800 interest, which is 45% per year. Trust me, for a buy here pay here deal that’s not unusual, and it’s actually not too bad either. You will find much, much more expensive deals out there.