Having a low credit rating can have a profound effect on your financial life, especially when it comes to making major purchases. Banks, credit unions, and other traditional lenders will usually balk at your business, leaving you with a narrow range of options that carry higher interest rates and other disadvantageous terms. Many dealerships promote their “we finance anyone” and “no credit checks” policies, but these games are also rigged against you.
Unfortunately, you’re going to have to navigate treacherous waters unless you’ve managed to save up enough money to pay cash for a car. However, the reality is that few people with bad credit are able to do that since most of their spare earnings go toward paying down existing debt.
Despite these difficulties, there are numerous strategies you can draw on to make buying a car as painless an experience as possible. After all, businesses understand that people with bad credit still need to get from A to B and a competitive marketplace has emerged to serve that exact demographic. The following tips will help protect your financial health as you shop for your next vehicle.
Plan Ahead
Financially responsible people never wake up one morning and say, “I feel like buying a car today.” Instead, they’re aware of the need to shop for a vehicle months in advance. If you have a low credit score, you can put that time to work for you by trying as hard as you can to improve your credit rating in the meantime.
During the months leading up to your purchase, keep yourself on your very best financial behavior. Do everything you can to pay down debt, promptly and on time. Also, be sure to avoid using credit to finance other major purchases. Lenders will view this as a red flag and strong indicator of a future loan default.
Set a Budget and Stick to It
Before you even start looking at vehicles, you should set lower and upper budget limits and operate strictly within their confines. Personal finance experts generally recommend a minimum down payment of at least 20% of the car’s total purchase price, with monthly payments that come to no more than 20% of your after-tax salary or wages.
Of course, if you’ve got bad credit, you’re probably managing other debts on top of your car, housing, utilities, food, and other mandatory spending. Thus, you’re safer rounding that figure down to 10% of your take-home pay, which will ensure you’ve got enough left over to meet other financial obligations.
Buy a Newer Preowned Vehicle
If you have bad credit, forget about buying a brand-new car. It’s a poor financial decision that will cost you in the long run and make it harder to get out of debt.
However, you should also think twice before buying an older used car that carries a cheap price tag. They’ll likely come with higher maintenance costs, which will only increase the amount of money you sink into the vehicle over your ownership period. Instead, strike a balance in the middle: look for affordable preowned vehicles that are on the newer side. They’ll likely require fewer repairs, run better, and deliver superior fuel efficiency. All these features will save you money.
Check for Help from Nonprofit Groups
Some jurisdictions have nonprofit agencies that advocate for lower-income consumers and people who are in financial binds. If there’s one in your state or province, contact them and explain your case to see if they can help you. They might be able to point you to sympathetic programs or financing sources that will help you secure better terms than you would have found on your own.
Educate Yourself on Interest Rates
As a consumer seeking a loan with bad credit, you should expect to pay relatively high-interest rates. That’s just how things work. However, some unscrupulous lenders seek to exploit people with low credit ratings, assuming they aren’t terribly financially literate and won’t understand the degree to which they are being hoodwinked by obscene interest rates.
Do a little digging on your own. See where car loan interest rates are for average consumers so you have enough context to advocate for yourself when negotiating with lenders.
Shop Around for a Lender and Get Pre-Approval
Lenders still want your business, even if your credit score doesn’t exactly sparkle. This competitive landscape can work to your advantage, so shop around to make sure you’re getting the best possible deal on your financing.
Once you’ve found a lender, get pre-approved for a loan. This will set your budget limit, helping you browse with confidence. An added benefit, this strategy will also protect you from dealerships who prey on consumers with low credit, since you won’t need to finance your purchase through them.
Consider a Co-Signer on Your Loan
If you have a parent, spouse, sibling, or partner with a good credit score, see if they’d be willing to co-sign your loan. This can help you rise above the “bad credit” lenders and their high-interest rates, potentially qualifying you for a bank loan with the same terms that someone with good credit would get. It’s a path well worth considering if it’s available to you.
Parting Thoughts
As a final piece of advice: beware of dealerships that offer financing to buyers with bad credit. While it may seem easy and enticing to finance your car through the dealer, these vendors generally have bad reputations, and for good reason. They often sell vehicles of dubious quality at inflated prices, hoping to trap buyers who feel they have few other options. Loan terms can border on usury.
If you’re going to buy your car through a dealership, perform careful and thorough research into the business’s reputation. How satisfied are past customers? Do they have a lot of negative reviews online? Do they seem to be trying to hide something or cover up complaints? If so, avoid them at all costs as it’s likely you’ll just trap yourself in another money pit that will just do more damage to your credit rating. Consider financing through a dealership only as an absolute last resort.
Andrei Kuchmiy / Maksym Povozniuk / Shutterstock