You may be surprised to find out that having bad credit doesn't limit you to buying a used car, or always keep you from buying a new vehicle. You just need to be aware of the guidelines to stick to with bad credit car buying. We have some tips for what kind of car you can expect to buy with bad credit and where to go to get financed.
How Bad Credit Impacts Car Financing Options
Bad credit impacts your car buying options in that it may be difficult to get an auto loan through a traditional lender such as a bank or credit union. Difficult doesn't equal impossible, however, and you should always try to get pre-approved if you can. This makes it a much simpler process once you get to the dealership, because you have an approval in hand.
Because getting a direct loan can be difficult, it's common for consumers with bad credit to finance through an indirect lender. You can't sit face to face with an indirect lender – instead, a dealer interacts with them on your behalf. These lenders can be from independent finance companies, or they can be captive lenders – the finance subsidiaries of car manufacturers.
Subprime lenders, who specifically work with the auto loan needs of bad credit borrowers, are also indirect lenders. When you're struggling with credit issues, a subprime lender is typically going to be your best bet for financing because they look beyond your credit score to other factors, such as your income, employment, and residence stability, that help them evaluate your application.
Vehicle Options with Bad Credit
Now that you know your best chance for financing is usually with a subprime lender, you may worry that this affects your vehicle choice. There's no need for worry, however. Subprime lenders work with all kinds of dealerships, including franchised and independent dealers, financing new, used, and certified pre-owned (CPO) cars.
Here's a closer look at what to expect when buying these types of vehicles:
New cars – You can finance a new vehicle in some bad credit situations, but you have to be prepared when you do. New cars typically have a higher selling price than used vehicles, and you're not going to get the lowest interest rate with bad credit, which increases the overall cost of financing. Sometimes, borrowers stretch out their loan terms to bring down the cost of a monthly payment, but beware of extending it too long. The longer the loan, the more you're going to pay in interest charges. Another thing to be aware of is that just because you can buy a new model doesn't mean you're going to qualify for the car of your dreams. Subprime lenders place you in a credit tier, and you're only eligible for the vehicles a dealership has that are within the price range for that tier. The perks of buying a new car include all the latest safety and technology features, a manufacturer warranty, and the peace of mind that comes with a brand new vehicle. The downside to a new car is that they depreciate quickly, and you're likely to spend a good chunk of time with negative equity (owing more on the loan than the vehicle is worth).
Used cars – Used vehicles are often a good bet for bad credit car buyers. Even though they have a lower selling price than new vehicles, used cars can be more expensive to finance in terms of interest rates. When you're thinking about buying a used vehicle, keep in mind that subprime lenders have a minimum financing amount of $5,000. This doesn't mean you can't purchase a less expensive car, but it does mean that the overall amount you're borrowing has to be at least that much. Lenders also typically have standards for age and mileage of the vehicles they finance, but the specifics vary. Usually, you can expect these restrictions to be around no more than 10 years old and no more than 100,000 miles. Used cars are sold as is, so be careful when inspecting and test driving a vehicle, and be sure to have it checked out by a certified mechanic to ensure it's in good working order. Because used cars vary in age, you might find that the vehicle you're buying has already seen its biggest drop in value, or that it could depreciate much more. Even though the lower cost means you're likely to get out of negative equity more quickly, the equity you're able to gain in a used car could be minimal by the time you're finished with it.
Certified pre-owned vehicles – CPO cars are a good middle point between new and used vehicles. These cars are usually late models, no more than three to seven years old, with many being three-year-old off-lease models. Mileage on CPO vehicles is usually capped at 60,000 to 80,000, and they're manufacturer-certified based on a multi-point inspection. CPO cars also get refurbished to manufacturer specs by a certified mechanic to meet the manufacturer’s requirements. Because CPO vehicles are a step up from a standard used car, they typically cost more, but are still thousands less than new models. The added cost is typically worth it though, as CPO vehicles often come with many of the safety and technology features buyers want, and also include some form of manufacturer-backed warranty that usually allows you to have them repaired and/or serviced at any same-brand dealer in the nation.
6 Things to Keep in Mind when Buying a Car with Bad Credit
No matter which type of car you buy, there are some things to keep in mind as a bad credit borrower. Being prepared for these six items can make your auto financing experience go more smoothly:
- Credit – Before beginning any car buying process, check your credit reports and get your credit score so you know where you stand. Knowing this allows you to research average interest rates for bad credit car buyers, and to know if you're getting a fair rate.
- Budget – A budget goes a long way toward successful auto financing. You should be ready to balance a monthly payment with a reasonable loan term, and know your debt to income and payment to income ratios based on the vehicle you’re considering. Lenders have caps on both ratios because they want you to be able to comfortably afford a car.
- Documentation – When you get to the dealership, you should be prepared to provide documentation to the dealer that proves your income and residence, that you have a working phone in your name, and a valid driver's license. You're also required to provide a list of personal references so the lender can verify general information about you. Other requirements vary by lender.
- Down payment – As a bad credit car buyer, you can't avoid making a down payment. The amount you need varies by lender, although subprime lenders typically require at least 10% of the vehicle's selling price or $1,000 down, whichever is less.
- Co-applicant – Though this isn't always necessary, you may be required to provide a cosigner or co-borrower when you finance a car with poor credit due to your credit history.
- Insurance – When you're financing a vehicle, you have to have full coverage auto insurance, regardless of your credit. GAP insurance – another form of insurance – isn't required, but it's a good investment, especially if you're financing a new car or CPO vehicle. GAP insurance guarantees to pay the loan balance in the event your car is totaled or stolen, which could be much more than the car’s actual cash value, especially during the first few years of a loan.
Let Us Help You Get Started
Now that you know your options for bad credit car buying, you need to find a dealership that's signed up with subprime lenders. That's where The Car Connection can help. We work with a nationwide network of special finance dealers that have the lending resources you need.
Let us connect you to a local dealership. The process is easy to get started. Simply fill out our fast and free auto loan request form, and we'll get to work matching you to a dealer in your area.