When you have bad credit, a car loan should be more about getting what you need than what you want. This doesn't mean having to buy a 15-year-old sedan when what you need is a reliable SUV for your family. But consumers don't always take into account the limits bad credit can place on buying power. Take this customer's question, for example:
"I recently applied for a loan, but none of the dealerships that have contacted me have the car I want. What's the next step?"
Let's take a look at why vehicle choice isn't the first step when you need a bad credit auto loan.
The Bad Credit Car Loan Process
To answer this consumer's question, the next step is to evaluate what you need out of a car right now. When you have bad credit, the auto loan process works differently than if you have good credit. With good credit, the process is simple: pick out a vehicle, go to the dealer that sells it, get financed, and then take delivery.
With bad credit, however, the process is almost completely reversed. In this situation, you have to get financed before you can pick out a car. If your credit score is below 660, the chances are good that you need a subprime auto loan. Subprime lenders are able to help people with less than perfect credit – not all lenders are willing to do this.
Subprime lenders only work through special finance dealerships, so you can't meet with them directly to get a loan. Instead, you go through a special finance dealer and they submit your loan application to one or more lenders for approval.
If you meet the lending requirements, the lender contacts the finance manager at the dealership to let them know your lending tier and maximum monthly payment. The dealer then presents you with a list of vehicles from their inventory you can choose from, test drive, and then finance.
Why Bad Credit Car Loans Are Different
With bad credit, car loans follow a different process because the lower your credit score, the higher the lending risk typically is. Because a lender is willing to take the chance to approve a loan for you, bad credit and all, they're going to do the best they can to ensure that you can complete it successfully.
This means providing you with a reasonable loan on a vehicle that's no more than 10 years old with no more than 100,000 miles. The minimum loan amount a subprime lender typically offers is $5,000.
Subprime lenders write loans for both new and used cars, but if you have bad credit, you're usually not going to qualify for a luxury vehicle. Even if you do, the interest rate you're most likely going to receive can often push higher end models beyond affordability.
As a bad credit car buyer, your interest rate can be in the double-digits. A vehicle that's hard to find, in high demand, or in short supply may be even more expensive than normal due to your higher interest rate.
You should stick with a reliable and affordable car that meets your needs now, to make sure you can successfully complete your loan. Then, you can put yourself in a position where you credit is good enough to get the vehicle you want the next time around, not just one you need.
Remember, credit doesn't become good or bad all on its own. Your actions – both good and bad – and your history of handling credit are what determine your credit score. The best thing about credit is that no matter how far it falls, it can always be improved.
Tips for Improving Your Credit
There are a few very simple ways you can improve credit. Here are a few tips that we like:
- Keep up with you payments – Paying all of your bills on time is one of the best ways to improve your credit, and keep it in a good place. Payment history, which is the record of how well you've kept up with payments across all of your accounts, makes up 35 percent of your credit score.
- Keep your credit card balances low – Just because you have credit available doesn't mean you need to max out your credit cards. A good way to keep you balances low is to use your credit cards to only buy what you have the cash for, then immediately pay off your balance. Lenders like to see that you're only using around 30 percent or less of your available credit.
- Keep your credit history going – Even if you don't use credit all of the time, you should keep a few accounts open and in use because your credit history accounts for 15 percent of your credit score. If you're trying to reduce your debt by closing all of your credit cards and accounts, don't. Choose to keep one or two of your oldest credit cards open, and use them periodically for small charges, like gas or groceries.
- Mix it up – If all of your credit falls under the same type, it might not be working hard enough for you. Keeping a mix of both installment credit (mortgage, loans) and revolving credit (credit cards) helps your credit mix, which makes up 10 percent of your credit score.
- Add new credit – If you don't have a good credit mix, this is where getting an auto loan can come in handy. Not only are you adding to your credit mix, but a new loan gives you the opportunity to make your monthly payments on time for the entire loan term, which can have a significant impact on your credit recovery.
Finding a Dealership for Your Situation
Now that you know why your vehicle choice may be limited with bad credit, are you ready to get back on the road with a car that meets your needs, even if it isn't your dream vehicle? If so, you've come to the right place.
Here at The Car Connection, you can research models with our new and used car sections, and we can help you find a dealership in your local area that works with lenders that can get you approved for a bad credit auto loan.
The process is simple and free. Just fill out our quick car loan request form, and we'll get to work matching you with a dealer in your area.