Buying a Car with Bad Credit

July 18, 2022

Your credit history plays a large role in whether you get approved for an auto loan or not and what interest rate you’ll be offered. Buying a car with bad credit can be a challenge even if you earn a good monthly income. Any history of late payments and/or debt will make lenders wary of offering you a good loan. However, having bad credit doesn’t mean you can’t still purchase a fantastic car but you’ll definitely need to do your research and plan ahead of time.

Build up Your Credit

If your credit history is poor, you can work on cleaning it up before purchasing a car. You can obtain a copy of your credit reports and see where you can possibly improve them. Looking at your credit report will allow you to see what lenders are seeing and to make the necessary changes so that you can qualify for a better auto loan.

One way to improve your credit score is to pay all of your bills on time. If you’ve got overdue payments, try to pay them promptly. You can also try to reduce your debt by paying off as much as possible which will improve your credit utilisation ratio.

In addition, you might find out that your credit report has incorrect details which you may be able to dispute and settle.

Look up the Interest Rate Norms

With good credit, you’ll typically be offered a lower interest rate than the norm and with bad credit, you’ll be offered a rate above the norm. However, you should know what the norm is so that you don’t get looped into a suboptimal loan since this will greatly affect how much you’ll have to pay monthly.

Know your Budget

It’s important to determine how much you can afford to pay monthly and overall before you sign onto any auto loan since you’ll be paying off this loan for a while. Generally, the more expensive the car, the more expensive the loan, and the higher the down payment will be.

You can determine your budget by looking at the amount of money you have left over monthly after paying all of your expenses and how much of that you’re willing to spend on car-related payments.

Keep in mind that in addition to the auto loan, you’ll also be paying for your car’s running costs such as fuel, insurance fees, maintenance, and repairs. Try to stick to your budget even if you’re approved for a loan that has bigger payments.

It may be tempting to opt for a long-term car loan in exchange for lower monthly payments, but this could mean paying much more money overall in interest rates, so make your choice wisely.

Make a Larger Deposit Payment

Putting down a larger deposit can decrease the interest fees and allow you to choose from a wider selection of vehicles. By reducing your interest rates you may be able to save money in the long run.

However, it isn’t always easy to come up with a deposit. It might be worth considering delaying your car purchase and saving up so that you can put down the necessary down payment and reduce your future costs.

Look Into Rent-to-Own Cars

If you have a bad credit history you aren’t offered a loan at all or you’re offered a suboptimal loan with interest rates that are too high, then don’t worry! You can look into rent-to-own cars instead.

Rent-to-own agreements allow you to rent a vehicle directly from a dealer for a fixed term, after which that car will become yours and you won’t have to make any more payments. One of the main benefits of rent-to-own cars is that you don’t need to have the perfect credit score.

Rent-to-own terms are typically 24-60 months but you can always buy out the car sooner. After you’ve paid all of your fixed payments or bought out the car, the vehicle becomes yours. Rent-to-own provides a good option for people who have bad credit or can’t otherwise afford to buy a car. Many of the cars offered at rent-to-own dealerships are used cars that are cheaper. Payments are done usually on a weekly, bi-weekly, or monthly basis directly to the dealership and include mechanical insurance.

To find rent-to-own dealerships in South Africa, have a look at this list of 700 dealerships across the country in every major city. You can also contact us for more information or fill in an application for a rent-to-own car. Applications are typically approved within a minute after which you’ll be able to choose a suitable car for you from the 700 dealerships listed.

Skip the Extras

If you have a bad credit score then you might want to skip the cool extra features like smooth leather seats, a sunroof, and so on. In this case, your best bet is to buy a cheaper but reliable car that fulfills all of its necessary functions. This ensures that you’re able to pay for your vehicle comfortably.

Research Cars Within Your Budget Range

Look at many different cars and models at different dealerships and even online to find the best car for you. Try to think of how you’ll use the car and what type of car you need. If you’re looking for a used car, have a look at local Facebook groups or Facebook’s Marketplace to see if anyone near your location is selling their car.

You could also ask friends, family, and colleagues for their recommendations, what car they drive, how the car has worked for them, the amount they pay each month on running costs and loan payments, where they got their loans from, and so on.

Get Pre-approved

Pre-approval allows the lender to check your credit details and for them to give you a ballpark figure of the loan that they’re able to offer you. Knowing this will give you a better idea of what type of car you can afford. This can also help you negotiate a better price at the dealership.

Look for the Best Option

You don’t have to accept the first option you’re offered. You look at what types of car loans various banks and lenders who work with people with bad credit scores offer. In addition, you can apply to multiple lenders and see who offers you the best deal.

Read All Documents Carefully

Car financing documents can be confusing and difficult to read so it’s always good to have someone read over them who understands them to make sure you’re not getting a less than stellar, or worse, a  shady deal.

Make sure all of the contracts include everything that you and the dealer have verbally agreed to.

Watch Out for Scams

Unfortunately, people with bad credit can fall prey to scammers who take advantage of the fact that these people may struggle to get a loan. These loans could end up poorly and make your credit score even worse in the long run.

No matter how much you want a car now, take your time in finding the best car loan and the best car for you.

Where to Find a Loan with a Bad Credit History?

There are different types of lenders that offer car financing. These include:

  • A bank or credit union. You apply for a loan at the bank, receive pre-approval and then take it to your car dealership. The loan is paid back directly to your bank on a monthly basis. If you have a good relationship with your bank, this could make them more likely to give you a loan and look past minor credit problems. You can apply for auto loans at a bank’s local branches or their website.
  • Online lenders. There are a variety of online lenders who offer loans for car purchases. The application process takes place online and interest rates vary widely based on the lender. It’s definitely good to do your research about these various lenders before signing up for a loan.
  • Dealerships-arranged loans. Some dealers also arrange their own financing options. If you apply for a vehicle at a certain dealership, you may be offered loan options from various lenders.
  • Direct dealership loans. Some dealerships also offer their own direct loans. These loans can be easier to get for someone with a poor credit score.
  • Rent-to-own providers. Rent-to-own companies are typically more likely to approve a client with a suboptimal credit score than some traditional credit providers. Check out Planet42 for example!