How to Buy a Car with Bad Credit

Young woman sitting in car being handed the keys.

The following is presented for informational purposes only and is not intended as credit repair.

Living without a car can be difficult. But having bad credit often stops many buyers from purchasing a new - or even used - car. With all the financial and referential requirements, it may even seem like buying a car with bad credit is impossible.

Luckily, this is not the case. There are plenty of ways to buy a car with bad credit without breaking the bank. All it takes is a little research, patience, and smart decision making.

Understand what you need from a car

Bad credit scores aren’t the end of the world, but they do limit your options when it comes to buying a car. Therefore, it’s incredibly important to take stock of your needs before you start your search.

For example, you will want to consider your timeline, and if can you afford to spend a few months (or even years) working to increase your score. Evaluate the road conditions on your commute, including seasonal weather patterns. Think about your hobbies, especially if you are someone who enjoys the outdoors, and look at what sort of features you may need to accommodate your lifestyle. Dependability and safety are key for every buyer and avoid unnecessary luxuries.

Check your credit score

After you’ve made a thorough inventory of your new-car requirements, check your credit score. There are multiple scoring models, though the FICO Score is the most well known. A FICO Score is a three-digit number that is broken down into five distinct categories. 35 percent of that number is determined by your payment history, 30 percent from your amounts owed, 15 percent from your length of credit history, 10 percent from your credit maximum, and 10 percent from new credit.

In general, a low credit score is considered anything below 650, while an excellent score is anything in the 720 to 850 range. Average is anything between those two numbers.

You should also get a copy of your credit report, which gives both you and the loan institution, bank, or credit union a more detailed report of your credit history. Credit reports show any missed payments, debts, and lines of credit.

If you have the luxury of time, do your best to up your credit game. Make a concerted effort to decrease your debt, pay bills promptly, and turn in your rent on time. Don’t make any unnecessary purchases and beef up your savings. If you haven’t already, prepare a detailed budget with reasonable expectations. Chances are good that you’ll be making monthly payments for a few years, and you’ll want to be prepared for any unexpected life changes, illness, injury, or expenses.

Do your research

Taking your time to do some research will save you in the long run. Interest rates fluctuate, so you’ll want to investigate current rates to determine when might be the best time to buy.

As a low-credit customer, you will be most affected by these changes, and you’ll want to be prepared. If you need some extra assistance, use a car payment calculator. You’ll also want to find a reputable dealer. Ask people you know for recommendations, read reviews on crowd-sourced forums, and check out locations with a reliable friend.

Be wary of independent sellers, and always ask for Carfax and detailed maintenance records. You don’t want to commit to a car that will ultimately cost you in the long run.

The more you can contribute to your down payment, the better off you will be. Putting down at least 20 percent will not only show that you are serious about your purchase, but it will also lower your monthly payments, taxes, interest rates, and fees. And, if you end up needing to sell the car before you’ve paid it off, you’ll decrease your chances of owing more than it’s worth.

Avoid bad credit auto loan companies

If you can, avoid opting in for in-house financing or loan companies that specialize in customers with low credit scores. These companies often take advantage of vulnerable customers by offering low monthly payments, then slapping on ludicrously high interest rates.

Your best bet for a fair loan will be your local bank or credit union. You know them, and they know you. Ideally, you’ve been with them for a while, and they can attest to your income and financial credibility more than a third-party institution.

You may also want to consider online companies. These institutions generally offer better rates than in-house financing and can sometimes give you more reasonable offers than local banks or credit unions. They don’t have the same overhead as places with physical locations, so they have the resources to give you better rates.

However, be judicious with your search if you decide to go the online payment route. Multiple inquiries can hurt your score, so make sure you are shopping within a very brief period, no more than a month.

If all else fails, consider getting pre-approved. Dealerships can do this for you but seek the assistance of your local bank or credit union first.

Avoid deals that are too good to be true

On the whole, your loan experience should be well researched, risk-free, and give you the best deal for your financial and lifestyle needs. When it comes to making the final decision, don’t get caught up in an unbelievable deal; chances are, it’s too good to be true. Be wary of scams and read all of the paperwork meticulously before you finalize your commitment.

If you are able to make a large down payment, submit your monthly payments promptly, and manage your personal budget accordingly, you will be able to slowly increase your credit score. Making solid, responsible decisions now will greatly improve your prospects of future investments.

Need help improving your credit or preparing for a major purchase? Start with a free credit counseling session from MMI. We can review your finances and provide personalized advice for how to reach your credit, debt, and savings goals. 

Tagged in Cars and car loans, Build your credit score

Haley covers financial, home, and auto topics for notable brands. She loves reading, writing, and saving money! After college, she paid off $29k in 1 year. She believes anything can be accomplished with a plan in place.

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