Tips to get approved for a car loan with bad credit

People seeking a bad credit car loan can benefit by getting pre-approved before car shopping then letting the dealer compete for a lower interest rate.

Car sales hit a record high in 2015 according to Low gas prices, employment gains and increased availability in credit sparked the record-breaking sales. People with bad credit don’t have to miss out on getting a car loan. However, while obtaining a new or used vehicle is within the realm of possibility, expect to pay a higher interest rate and monthly payments.

People seeking a bad credit car loan will best benefit by working with a lender that can meet your needs without overcharging you. You may have to work with small loan companies for bad credit auto loans rather than big name banks. Many traditional lenders refuse to provide auto loans for people with bad credit.

If you’ve been trying to purchase a vehicle and keep getting turned down for financing because you have less-than perfect credit, don’t despair. When buying a new car, the main factors that will determine your monthly payments are: how much money you put down (or trade in), how long repayment terms will be and your credit score.

Here are a few more tips to get the best bad credit auto loan.

Check your credit scores first

Your credit score ranges from 300 to 850 and is based on your credit report with the three credit reporting agencies — Equifax, Experian and TransUnion. A high credit score qualifies for a better car loan rate than one with a low score. Shaving just one percentage point of interest from a $15,000 car loan over 60 months would save hundreds of dollars in interest paid over the life of the loan.

Because lenders rely on your credit scores to decide if you qualify for their loans, it’s important that you know your scores before applying for a car loan. Plus, your credit scores may not be as bad as you think. Don’t settle for a high interest car loan just because you think you have bad credit. Without checking your scores first, an auto dealer can tell you anything. Some lenders use the typical FICO scores to make a lending decision while others use specialized auto lending FICO scores. While you may not have access to the exact credit scores used by a lender, can give you a pretty good idea of both your regular FICO score and your auto-enhanced FICO score for a fee.

Get your financing first

Avoid any mishaps with an auto dealer by getting your financing first. Stepping into an auto dealership with your financing in hand is the next best thing to paying cash. You don’t have to worry about the dreaded, long drawn-out process of sitting down with the finance office. While you can expect to spend some time at the dealership, having your own financing cuts that time significantly. When the finance manager pitches various warranties and protections, you can use your pre-approval as an easy way of saying no. Let the finance manager know you’ve been approved for a certain amount and you don’t want to spend any more.

Plus, being pre-approved lets you know exactly how much you can spend. One of the best perks of being pre-approved is that the dealership will likely try to beat the interest rate you already have. That can work to your advantage in getting the lowest possible interest rate.

Additionally, once you’re pre-approved, you can shop for the car as if you had a check in your pocket. This helps you keep focused on the actual selling price of the car, rather than keeping track of the interest rate, down payment, loan term and trade-in.

Where to get a pre-approved bad credit auto loan

Bad credit auto loans are available from banks like Wells Fargo or Capital One. Some credit unions like Digital Federal Credit Union offer auto loans for bad credit along with refinancing high interest auto loans at a lower rate. Online credit auto lenders such as Cars Direct and Instant Car Loans offer car loans for bad credit. The interest rates and requirements will vary by lender but the best interest rates are usually reserved for those with good credit.

Lenders such as Cars Direct and Instant Car Loans are more willing to take a chance on people with less than perfect credit. The rates will be higher, but at least you’ll know what you can afford. Once you’re approved, the lender will give you the total you are allowed to spend and the interest rate for which you were approved.

An online bad credit auto lender can approve you when other lenders won’t. Instant Car Loans has helped over 1,300,000 consumers find the right car and the right car loan according to their website.

Avoid trading in a car that has a balance

It may be tempting but avoid trading in a car that has an unpaid balance that is more than the worth of the car. “Negative equity is the term.” It means you owe more on your car than the car is worth. Run when you hear a car dealer say ““We’ll pay off your loan no matter how much you owe.” There’s more to that deal than you may understand. Dealers include the negative equity in your new car loan. That would increase monthly payments by adding principal and interest. You will be paying interest on that negative equity for the term of the new loan.

Keep up with monthly payments to improve your credit scores

Because having bad credit makes you a high-risk borrower, one missed payment can result in repossession. A repossession can stay on your credit reports for 7 years. On the other hand, on-time monthly payments can help improve your scores. Payment history has the biggest impact on your credit scores—35%. Make your monthly payment on time, every time, or risk doing damage to your scores.

The credit scoring formula takes two different loan types into consideration when calculating your score—installment and revolving. Auto loans are considered installment loans because a fixed loan amount is paid back on a regular payment schedule over a predetermined amount of time. Auto loans add to your credit “mix”. Another way auto loans can help your credit scores is by adding to your mix of credit. Your credit mix determines 10% of your scores. Plus, by proving your creditworthiness, you might be eligible to refinance at a lower interest rate after time.


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