How To Get a Good Deal on a Bad Credit Car Loan

After an unexpected year in the automotive world due to COVID-19, many buyers are now emerging, vaccinated and ready to hit the dealer showrooms for a new(er) car – finally! But you'd better act fast if you're a bad credit borrower looking to save money on vehicle financing this summer.

Holiday Sales Can Help You Save

There are a lot of different opinions about when the best time to buy a car is, but classically, one of the busiest times in the automotive market is Memorial Day. This is when many manufacturers and dealerships alike roll out special deals and summer savings to entice buyers.

How To Get a Good Deal on a Bad Credit Car LoanMost holidays typically reward shoppers with decent savings, but for bad credit borrowers, it might take a little legwork to find the deal you're looking for – especially this Memorial Day. A recent survey conducted by Kelley Blue Book indicates that most shoppers are expecting to see fewer deals and higher prices while looking for a vehicle.

Of the respondents, nearly 60% of buyers are expecting lower incentives to be offered by automakers, while 42% said they're expecting to pay more than the sticker price to buy a car right now. Some of this willingness to shop for a new or used vehicle right now is being driven by the sharp decline in new vehicles hitting showroom floors this year, due to a global microchip shortage.

Three out of four people said they're aware of the chip shortage and its impact on auto manufacturing and prices. However, only 37% of shoppers said that it's enough to make them hold off on buying a car.

Since shoppers aren't willing to wait to get the deals they'd ultimately like, it's important to shop for the right deals to make the most of your situation – especially if you're dealing with less than perfect credit.

Keep Your Loan Budget-Friendly

A lot of holiday savings that you find on vehicles pertain to new cars. However, it's still possible to find some good deals on used inventory. And this may be your ticket to ride in a new-to-you set of wheels. In order to get the deal that's right for your situation, make sure to research the options available near you.

Deals vary by manufacturer and dealership, so in order to save the most on your next bad credit car loan, make sure you keep these points in mind:

  • Know where your credit stands before you start shopping for a vehicle. Knowing your credit score and what's on your credit reports is a good way to determine what type of lender is right for your situation, minimizing turndown chances.
  • Stick to a budget! Subprime lenders that work with bad credit borrowers calculate how much you're currently spending on your monthly bills, and typically don't allow you to finance a vehicle with a payment of more than 20% of your gross monthly income, including full coverage insurance, which is required while financing a vehicle. Lenders use two calculations:
    • Debt to income (DTI) ratio – Compares your monthly pre-tax income to your current bills. If you're already using more than 45% or 50% of your income you may struggle for an approval with some lenders.
    • Payment to income (PTI) ratio – This lets lenders see how much of your income is going to be used by your car payment and insurance premium. Lenders generally cap this at 15% to 20% of your budget, but the lower your PTI, the better.
  • Your interest rate may be higher than that of a borrower with good credit.
  • You may have an even more limited selection of vehicles to choose from due to loan restrictions caused by bad credit.
  • The minimum loan amount financed for a bad credit auto loan is typically $5,000, but you don't have to purchase a car this expensive. As long as the total of the loan after taxes and fees is at least this much, the loan may be large enough to meet a lender’s stipulations.
  • A down payment of at least $1,000 or 10% of the vehicle's selling price is almost always required when you have poor credit.

Additionally, keep in mind that you need to meet several lender requirements in order to be considered for a bad credit car loan.

Rate Shopping for Your Deal

To really save money and get the savings that work for you, it's a good idea to do some rate shopping before settling on the first car you come across. Since different lenders work with different dealerships, you may be able to get more savings at one dealership vs. another.

To know for sure, apply for auto loans with a few lenders in a short, two-week timeframe. Doing this allows you to compare inventory and get an idea of what your interest may look like, so you can choose the option that fits your needs – without worrying about multiple credit checks impacting your credit score.

Not only can you save money in the long run by choosing the auto loan with the lowest interest rate, but you can also minimize the impact on your credit score, too. When you keep your search to a 14-day window, the national credit bureaus recognize that you're looking for a specific loan. Each hard credit pull shows up on your credit reports, but only one of them will temporarily impact your credit score.

Ready to Find a Deal?

If you're ready to get a good deal on financing while building your credit, you're in the right place! At The Car Connection, we connect bad credit borrowers with the lending resources they need by matching them to dealerships in their area. Let us point you toward your next vehicle – simply fill out our zero obligation auto loan request form to get started now!

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