When buying a car with bad credit your poor credit rating puts you at disadvantage in the auto financing world. There are several reasons: Dealers usually mark up financing rates and/or vehicle prices for bad-credit buyers. You’d always get higher interest rates than what people with good credit can get. And there are some lenders and dealers who work with only prime borrowers.
Nevertheless, here are two ways on how you can beat the odds when buying a car with bad credit:
Big Down Payment
The ideal down payment is 20% of the total vehicle purchase price. But there are some dealers and lenders that do not require a down payment. Although it looks like it’ll save you money, it really doesn’t. By skipping the down payment, you only allow your outstanding balance to balloon, as well as your monthly payments.
In any case, put some money down upon a car purchase even if you have bad credit. The down payment can be a hefty sum but it is a worthy investment. Moreover, lenders and dealers who’ll see your capability and willingness to pay the down payment are more likely to consider you for a decent auto loan.
Preapproved Auto Loan
Regardless of credit standing, dealers mark up the interest rate on every loan they get from lenders. For example, if the base rate of a certain loan is 1.5%, a dealer may offer it to their customers as 2.5%. Dealers say that the additional percentage points reflect the compensation for their service of arranging loans for buyers. But this system usually results in abusive loans, especially with bad credit car buyers.
What many buyers don’t realize is paying a high interest rate adds $50 to $100 per month to what you ought to pay. If the loan is financed over 5 years, that’s extra $2,500 to $5,000 over the life of the loan. There are certainly more important things, like debts, you can use that money on.
You can find a cheaper loan outside the dealership. So before having a dealer arrange financing for you, get preapproved with a bank or credit union first. Some banks, though, may not be willing to accept bad credit auto loan applications. But if you are a member of a credit union, expect things to be easier.
Bottom Line
When you have bad credit, it’s nearly impossible that you won’t be offered a high interest rate and a too-good-to-be-true no-down payment deal. Keep in mind that not all lenders and dealers out there are willing to work with people with poor credit. One way to successfully get through the process is arranging financing yourself or getting preapproved for an auto loan.
In this way, you would already know how much car you can afford and the loan amount you can get approved for. You won’t have to settle for a car which the dealer says the only car you can get approved for. And lastly, you have more negotiating power when you walk into a dealership.
