Buying a car with a bad credit score can be a daunting task. Fortunately, some lenders and subscription services are willing to work with people who have been through a tough time and are rebuilding their damaged credit score. If you need a new car and your credit score has suffered in recent years, here are some tips to help you.
What is bad credit?
A credit history and score will slowly build as someone applies for and uses credit products like a credit card. A solid credit rating is a valuable tool that consumers can use to obtain loans, such as mortgages, lines of credit, and car loans. Certain factors can affect a consumer’s credit rating. If that consumer has been responsible with their credit, paying their bills on time and in full, their credit score will increase, and it will be easier for them to obtain credit and loans.
On the other hand, when users are irresponsible with their credit or make late payments, their credit rating will go down. Then, once that same consumer has bad credit, it can be very difficult to improve and obtain loans and other credit products.
Look at your credit score
It would be best to look at your credit score before you start looking for an auto loan. Learning about your credit score and seeing what positive and negative items are listed on your credit report will help you know where you stand. This way, you can determine what options are available to you.
If you have a credit rating of 690 or higher, you will most likely get the best interest rate loans available. Scores between 550 and 689 are considered subprime. If you have a subprime score, you can pay higher interest rates. If you have a credit score of 550 and below, it may be difficult to get a car loan, as it is considered a poor credit score. However, at the state level, usury laws prevent lenders from being predatory even if you have very bad credit.
Check your credit report for accuracy
About one third of credit rating information is incorrect, outdated, or incomplete. This can have an erroneous negative impact on your credit rating. If you discover a false entry in your credit rating, you have the right to have it corrected immediately! It is also important to keep an eye on the deletion deadlines. If the deadline for deleting entries has expired, your credit rating can improve! Only complete and correct data will lead to a fair credit rating.
Explore your opportunities
Once you’ve had a look at your credit score, you can focus your attention on exploring various financing opportunities – there are many – but we will give you a short description of each so you can find the best option for you. We will also give you general advice on how to improve your credit score.
Purchasing a car with cash
This is a good option if you can afford it or want to purchase a used car but don’t want to deal with car loans.
However, consider these things before you rush to buy a brand new car.
Particularly with new or young used cars, the loss in value is exceptionally high when buying. As soon as you leave the dealer’s yard, the car loses value. The vehicle belongs to the buyer as soon as it is paid off. The value is no longer as high as it was on the day of purchase, but the owner is free to decide what to do with their car and does not have to abide by mileage restrictions or certain workshop connections. In addition, the car does not have to be in immaculate condition, as is the case when leased vehicles are returned. Nevertheless, handling the vehicle with care is worthwhile, as the condition plays a role at the latest when selling the car. Note that If you have a bad credit score, you most likely won’t be able to choose this option, as it likely is going to be pricey, and you won’t be able to take a significant sum loan with a bad credit score.
What about used vehicles?
You may think that used vehicles could be a great choice over a new car from a vendor, and in many ways, they indeed are. They are more affordable, and as long as you have the money, your credit score won’t matter as much. You can also haggle since the vehicle most likely comes from a private seller.
However, used cars also come with their caveats. One of the biggest problems if you are buying the car from private sellers is that they may lie about its condition and you might end up spending more money than you would have buying a new one instead. So if you are going to purchase a used car, make sure you find a good counterparty and inspect the car as much as possible before purchasing or asking for the service book.
Bank or credit union
Try to get a loan through your credit union. If you already have an account with a credit union, it is good to inquire about loans with them first. Credit unions are generally more lenient than other banks in terms of their qualification requirements, especially regarding their members. If you are not a credit union member, join one and ask about auto financing for problem loans. You need a government-issued ID and a minimum deposit to open a bank or credit union account. Once you’ve opened your account, talk to a credit representative about car financing options. They will likely be able to tell you the same day whether or not you have been approved and for what amount. Take your credit approval letter to the car dealership, which will contact the credit union directly. If you already have a relationship with your credit union, they may be able to work out a better interest rate for you.
Explore loan options through subprime lenders. Subprime lenders specialize in lending money to people with damaged credit. An internet search will return numerous subprime lenders, and you can often fill out an application online and receive a response within minutes. Again, be prepared to pay a high interest rate. You will need to provide identifying information such as your national insurance number, date of birth, and previous addresses.
Get a co-signer
If you are not approved for the car loan yourself, another option is to get a family member or friend to co-sign. This means that the lender (the credit union, car dealership, or another lender) will consider that person’s credit score alongside your own. This can be a good way to get a loan, and as you make payments, you improve your credit score. You can do this through almost any lender (credit union, dealer, or subprime). If you are not approved for a loan through one or all of these channels, talk to them about getting a co-signer.
You will then need to discuss this with your family member or friend. Your co-signer must either appear in person to sign the paperwork or submit identifying information and signatures online. Remember, your responsibility will become a shared responsibility, so you will have to ensure that you pay for everything on time.
Leasing a car
Want to get behind the wheel of a new automobile without the high monthly payments that come with car ownership? In many circumstances, leasing a car allows you to drive a new vehicle for less per month than a traditional auto loan.
These are the advantages of leasing a vehicle:
The cost of leasing a car may be higher for private individuals than buying one, but you pay monthly instalments and not a high purchase price. Another advantage is that you do not have to commit to a specific vehicle for a long period. Services such as maintenance or car insurance can be integrated into the leasing contract. If you prepare for the return, return the vehicle in good condition, and, in the case of kilometre leasing, have not driven significantly more than agreed, you do not have to worry about additional payments. Normal signs of wear and tear or signs of use are fine; the lessee already covers these during the term of the leasing contract through the monthly instalment payments.
However, there are many caveats with leasing a vehicle:
- The car remains the property of the leasing company;
- There is a restriction on use (e.g., through kilometre leasing);
- Possibility of additional payment on return;
- The extent of insurance cannot usually be determined;
- It is challenging to terminate a leasing contract prematurely;
- All service intervals must be observed and the vehicle must always be maintained.
Beware of scams
Loan scams most often target people with bad credit. Don’t fall into these traps, no matter how much money they want for a new four-wheeled vehicle. Most of the time, the buyer ends up with a new problem on their record. Be sensible and make the best possible decision about your finances, no matter how much you want a new car.
Rent-to-buy is a subscription-based model, where you pay a flat monthly price until eventually, you can buy out the vehicle from the seller. There are several services that offer it, such as Planet42! The big benefit is that you get the best of both worlds, you get a car of your choice, and no matter what your credit score you will be able to rent-to-buy.
First, you choose a car of your choice, and then the company buys it for you. After that you pay a flat monthly fee until eventually you are given a choice to buy out the vehicle and own it with no strings attached. With Planet42 you can also choose to buy out the car anytime or return it earlier!
Planet42 has an extensive list of FAQs to help you pick and see if rent-to-buy is for you!
How to make a good car purchase?
Now that you already know the main ways to buy a car, it is important to dedicate your attention to other factors. After all, we are not only talking about the purchase of goods of bigger value, but the accomplishment of a dream. Therefore, it is essential to take certain precautions, especially before such a big purchase.
Do a financial planning
Have you heard a well-known saying that no wind blows in favor of those who do not know where they want to go? Well, this metaphor illustrates the importance of good planning to achieve great goals.
If you want to buy a new car or any of the other options that we have mentioned above, it is necessary to be sure about some points. Know right away that this purchase will require sacrifices, will have its costs, and will bring some changes to your budget. Therefore, it is essential that you plan to achieve this goal.
Choose a model that meets your needs
It is natural that most people dream of buying a luxury car, with several technologies and a powerful engine. In reality, however, this is not always possible, mainly because of the costs. So, when you decide to buy a new car, try to keep your feet on the ground. Do your financial planning, be aware of your possibilities, and, within that, choose a car that meets your demands.
Stop to think: there is no point in buying an extremely expensive car and then suffering to pay its costs. In the same way, it makes no sense to buy a vehicle with an extremely powerful engine if you intend to use it only in the city, to go to work, and to go out on the weekends. The purchase of a car must be made in a conscious way, prioritizing your real needs.
Always consider post-purchase costs
Another care that can avoid a lot of headaches is to consider the costs that a car generates after the purchase. Many times, the will to fulfil this dream makes us forget to put on paper the extra expenses that having a car in the garage can generate. What you can do is add to your monthly and annual expenses with things such as:
- Fuel: the more you drive it, the more you spend on fuel;
- Maintenance: especially when buying a used car, maintenance usually has a negative impact on finances, whether it’s changing oil and filters or replacing worn and damaged components;
- Insurance: the insurance value may become a “great villain” of your budget because it tends to vary a lot in relation to the location, the age range of the main driver of the vehicle, and the cost of the good itself.
Improving your general reputation
Improving your credit rating is a time-consuming process, but it is very important if you want to be approved for a loan. After all, lenders and creditors want to know that you will be able to pay them back in full, and a good credit rating is one of the best ways to do this. So if you have bad credit, you can improve your credit rating gradually:
Staying at the same address for at least a year
Even lenders who specialize in poor credit want their customers to be reliable. One way to demonstrate this is to stay at the same residence for a year or more. If your credit report contains an endless string of addresses, this is not a good sign of your reliability.
Get a phone
When you apply for a loan, your lender may need to contact you. This is only possible if you have a phone. If they don’t have a phone, it will be difficult for them to communicate with you, but you will also look irresponsible. Visit a phone provider in your area and discuss phone plans (including prepaid options) that suit your budget.
Get at least one major credit card
Being approved for a major credit card (such as a Visa or Mastercard) can improve your credit score. This can be difficult if you have bad credit. However, you can work towards this by opening a less reputable credit account and making all your payments on time. After a while, you can reapply for the visa or Mastercard.