Buying a car when your credit is bad can be an exercise in frustration and stress management. Approvals are tougher to come by and interest rates — what a lender charges you to borrow the money — can run into double digits. It’s not pretty.
Lending is based on risk. The more risky a borrower seems to be, the less money he can borrow and the higher his interest rate will be. Lenders view people with missed payments, a repossession or a bankruptcy in their recent past as “high-risk.”
But things may not be as bad as you think. Many people believe their credit is worse than it actually is. Moreover, there is almost always a lender willing to take a chance on even a high-risk borrower.
Here are five suggestions for navigating the buying process when you have bad credit:
If you are shopping for a car with bad credit, it’s probably a case of need rather than want. All you really need is transportation, so don’t set your sights too high. Think of it as replacing a broken refrigerator. When push comes to shove, what you need is to keep cold stuff cold and frozen stuff frozen. Do you need an automatic ice maker, wine cooler or cold-water dispenser? Forget the frills; choose a basic car to get you where you need to go. Make your payments on time, and you’ll be able to buy what you really want the next time around.
Know Where You Stand
Don’t take for granted that your credit is as bad as you think, or that the nation’s three credit agencies have perfectly up-to-date records of your credit history. Because credit scores are a snapshot of our creditworthiness at any given time, they are constantly changing, reflecting our current credit status. As bad credit issues fall further in our past or are resolved, our credit score improves. Yours may well be higher than you expect. Get your credit score and credit report from each of the three credit agencies (Experian, Equifax and TransUnion).
Take Stock, then Action
Because your credit score will determine whether your loan is approved, how much money you can get and what the interest rate will be, you want the three credit reports to be as clean as possible when buying a car. Fix what you can by paying off any balances in collections and catching up on payments. The information creditors provide isn’t always accurate. Each credit agency has a procedure for challenging incorrect information, so if you discover a reporting mistake, challenge it separately with each agency.
Get Some Skin in the Game
If finances are haunting you, putting together a down payment for a loan may be difficult. But in the eyes of a lender, the larger the down payment, the better. Also, cash is king. Although trading in a car with some equity — in other words, it’s worth more than you owe on it — is good, putting down some cash with it is better. It demonstrates to lenders that you have the means and the discipline to save.
Be Prepared and Honest
We always recommend securing financing before shopping because it helps you avoid making split-second decisions under the stress of closing the sale. But whether in the business office of a dealer or in front of a lender, always fill in the blanks truthfully. The information you provide will be verified. Fudging on your job status, income or any number of other key factors can kill your chances for a loan. When applying for a loan, take supporting documents with you: recent pay stubs from your job, an electric bill showing your address and so forth. It makes you appear organized and on top of your finances.