Financing a car with bad credit can be difficult, but not necessarily impossible. Checking with the credit experts at Experian, we found, as a percentage of all car loans at the end of 2019, loans to higher-risk borrowers were down slightly. Those higher-risk borrows fall into credit categories Experian labels nonprime, subprime and deep subprime. Nonprime borrowers are those with a 601-660 credit score. Subprime includes those with credit scores between 501 and 600. Deep subprime is below 500.
Borrowers in the subprime and deep subprime categories often have a major ding to their credit in the recent past. Loans in collection, bankruptcy or the repossession of a home or car can throw a borrower into one of those lower credit-score categories.
The good news: Financing a car isn’t only available to those with gold-plated credit. Despite the fact fewer car loans were made to those with weaker credit in 2019 than the previous year, those three categories of borrowers still secured nearly 39 percent of all car loans. Lenders generate their profits by making loans. They want to finance cars. Your job is to find the lender who wants to finance your next car by making yourself appear as low risk as possible. Here are the five keys to do just that:
1) How to Obtain My Credit Score?
Your credit score is a snapshot of your credit worthiness at any given moment. It can change from week to week, or month to month. If you haven’t checked it in the past six months, do so before shopping for an auto loan. It’s the first piece of information a lender considers and serves as the best tool to determine your credit status, as well as the interest rate for which you qualify. There are a number of sources for obtaining your score, such as Experian’s Free Credit Score. WalletHub.com now provides free credit scores, as well as credit reports that are updated daily — all you need do is register.
2) How to Obtain My Credit Report?
While a credit score is a snapshot of your current credit health, a credit report provides your credit history, e.g. loans you’ve had and whether you pay on time. It will also show any loans that have gone into collection, bankruptcy and repossessions. Three major credit information agencies — Experian, TransUnion and Equifax — collect information from lenders to build your report, which they supply to lenders upon request. You need to know what is in your report before a potential lender sees it. You have a right to one free report per year from each agency.
3) How Do I Raise My Credit Score and Report?
Never take for granted that lenders have provided the three credit-reporting agencies accurate information. They do make mistakes. Each agency has its own established procedures for disputing misinformation. When you find an error on your credit report, dispute it with the reporting credit agency yourself. This must be done individually with each agency where the misinformation appears. They don’t talk to one another.
This is also the time to do whatever you can to clean up any legitimate negatives on your report. Pay off balances in collection, and pay all accounts so they are up to date.
4) How Important Is a Down Payment?
Anyone under financial stress will probably struggle to come up with a decent down payment; but the more “skin” you have in the deal, the more likely it is that a lender will take a chance on you and maybe even charge a lower interest rate. Lending is all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you will be to default on the loan. Whether it’s a home mortgage or a car loan, lenders view 20 percent as a reasonable down payment. You may get away with less. If your credit is really weak, however, putting down more will help convince a lender you are serious about your finances and further improve your chances.
5) Where Can I Get a Car Loan?
No matter how weak you think your credit is, it just may be better than you think. Before ever setting foot on a dealer’s lot, you should approach a variety of lenders with the goal of getting pre-approved. Understand that although finance companies are probably your best bet for securing a subprime loan, banks and credit unions are looking more favorably on borrowers with less-than-sterling credit. Don’t rule them out in your search.
Even the lending division of some carmakers, such as GM Financial, are open to financing a car for those with weaker credit. You will have to apply with these carmaker-owned finance companies at the dealership, but still shop around so you have a ballpark idea of the interest rate to expect.