Buying a new or used car can be a stressful process. This is especially true for those who attempt to get a car loan who have very poor credit. Auto loans are far harder to come by when you have poor credit and even when you are approved for a loan, there is often an extremely high interest rate associated with it.
So what are the best ways to get a car loan if you have very poor credit? Here are a few tips:
- Get a cosigner
- Save for a larger down payment
- Take steps to improve your credit score
- Shorten the length of the loan
Get a cosigner
One of the best ways for someone with bad credit to still get an auto loan is to have a cosigner when you go to purchase a car. This cosigner is someone who will guarantee that if the car owner fails to pay their loan, they will then be legally obligated to assume these debts. A cosigner is usually someone with much better credit who the lending institution will feel much more comfortable signing a loan over to.
It should be noted that if you are asking someone to be a cosigner on your auto loan, you should make sure to fully explain what their liability is. A cosigner should be someone that you trust and also who trusts you to make your auto loan payments in full every month.
Save up for a larger down payment
The larger an auto loan is, the harder it is to get approved. This is because banks or other lending institutions want to ensure that they will see these loans returned to them with interest. Because larger loans come with more associated interest, lending institutions have much stricter requirements to give out these larger sums.
So, those who wish to get a loan for a car can save up a larger down payment. This larger down payment will then make the loan amount smaller. Smaller auto loan amounts are far more likely to be approved than much larger loans.
Take steps to improve your credit score
A credit score is one of the biggest determining factors in whether or not a car buyer will be approved for an auto loan and also what their final interest rate will be. The first step to improving your credit score is to know what your credit score currently is. You can do this by checking with one of the three major credit reporters. Each of these companies allow you to check your credit once per year for free. This means that if you space out checking in on your credit score, you can check it once every four months absolutely free. A credit report will show a potential car buyer what is negatively impacting their credit which can give them an idea of what steps they can take to improve it.
One of the most important things to remember is to always pay bills on time each month. Additionally, this gives consumers the opportunity to find a mistake on their credit report which could be dragging down their score. These mistakes can be reported and permanently removed from your credit history which will give an instant boost to your overall score.
Shorten the length of the loan
Those with bad credit often try to string their loan payments out as long as possible because this means a lower monthly payment. This usually raises the interest rate however because the lending institution isn’t getting their money back as quickly. To combat this and make them feel more comfortable with giving you the loan, you can ask for a shorter loan term. This will mean higher monthly payments but will actually save you money in the end because of less interest on the loan.
Getting a car loan when you have poor credit can feel like an uphill battle. It seems as if all of the factors that go into loan approval are working against you. Every individual’s circumstances are unique and thus not all of the tips above may apply to each car buyer. The key is to understand your particular situation and take the necessary steps to improve your credit and receive an auto loan.