As of May 2017, over 107 million Americans currently have an auto loan. In order to get the car of your dreams, you need financing; in order to get financing, you need good credit. Experian estimates that 30 percent of Americans have poor or bad credit, ranging from 300 to 600. If your score falls within this range, don’t fret. With a different shopping approach, you can still get behind the wheel of the car you want.
Clean Up Your Credit
Three months before you plan on buying your car, clean up your credit. Online sites and credit card companies now offer free copies of your credit report, so it’s easy to see where you can improve. Start by paying down any outstanding loans or credit cards, get yourself out of collections, dispute any fraudulent charges, and pay back any charge-off items.
In three months, following these steps may boost your credit score just enough to decrease your car loan’s interest rate.
Save Some Cash
Saving money is not easy to do, especially when you’re paying down debt, but if you can manage to save some cash for a down payment, you increase your chances of finding a willing lender. A down payment has two major benefits. You won’t have to borrow as much money, and you also give the lender some peace of mind. Both of these aspects work in your favor: even making a small down payment will pay dividends now and down the road.
Shop Around for the Best Rates
If you have poor credit, you will automatically fall into the high interest rate category because of the perceived risk to the lender, but that doesn’t mean you shouldn’t shop around. Some lenders are more accepting of borrowers with bad credit, but beware: these lenders might take advantage of you and offer predatory rates.
The dealership you choose might not have the best interest rates, especially used car dealerships that advertise bad credit financing. Instead of getting suckered into these loans, check with a reputable dealer, bank, or credit union to see what they have to offer.
Know What You Can Afford
If everyone could have the car they wanted, the roads would be jammed with Lamborghinis and Porsches. Unfortunately, that just isn’t the case. Remember that all lenders look at your debt-to-income ratio, which is all your monthly debt payments divided over your monthly income. If your ratios is over 40 percent, you won’t get the loan in most cases. Push the numbers to see what you can afford, and even if you’re approved for more, don’t fall into the trap–signing for a loan you can’t afford could put you in collections later on.
Bad credit doesn’t have to be a hindrance. After financing your car, make an effort to improve your credit score. Pay down any credit card debt, pay off any charged-off accounts, and avoid the temptation to spend outside your means, and you should be on your way to better credit in the future.
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