How to finance a car when you have bad credit

Here's the reality of taking out a car loan. Lenders make money by making loans. They don't just want to finance a car, they have to finance a car to survive. Your goal is to make yourself look as “low risk” as possible to find a lender willing to finance your next car. Read below for his five keys to making it happen.

1. How do I get my credit score?

Your credit score is a snapshot of your creditworthiness at a particular moment in time. It can change from week to week or month to month. If you haven't checked it in the past six months, check it out before you buy a car loan. This is the first information lenders consider. This serves as the best first tool lenders use to determine your credit standing and the interest rate you qualify for. There are several legitimate online sources to obtain your score, including Experian's free credit score. Many credit card companies offer free credit scores to cardholders.

car loan credit score

Borrowers in Experian's subprime and deep subprime categories often have significant recent credit damage. Subprime borrowers have credit scores between 501 and 600. The deep subprime category is less than 500. Loan repossessions, bankruptcies, and home or car repossessions can cause a borrower to fall into one of the low credit score categories.

The good news is that car loans aren't only available to those with gold-plated credit. However, in 2023, financial institutions issued fewer car loans to people with weak credit than the previous year. The latest data available shows that these two categories of borrowers secured approximately 14% of all new and used car loans in the third quarter of 2023.

Borrowers in Experian's near prime category have retreated after increasing over the past two years. These are borrowers with credit scores between 601 and 660. In the third quarter, they accounted for approximately 17% of all new and used car loans. This portion decreased from approximately 18.33% in 2022 and 18.61% in 2021.

plus: 19 ways to save money on your next car

2. How do I get my credit report?

Your credit score is a snapshot of your current credit status, while your credit report shows your credit history, including previous and active loans and whether you're making on-time payments. It also shows loans that have gone into collection, bankruptcy, or foreclosure. Three major credit bureaus – Experian, TransUnion TRU;
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Equifax EFX,
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— Gathers information from lenders, creates reports, and provides them to lenders upon request. Before a potential lender looks at your report, they need to know what's on it. You are entitled to one free report per year from each agency. Order the report and use it as a roadmap to correct any negative information.

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3. How can I improve and report my credit score?

Don't take for granted that your financial institution provides accurate information to the three credit bureaus. they make mistakes. Each agency has its own established procedures for disputing misinformation. If you find errors on your credit report, file a formal dispute with your reporting credit agency yourself. You must do this for each government agency that has incorrect information posted. they don't talk to each other.

Take your time and do everything you can to remove legitimate negative marks on your report. Pay off the collection balance and pay off all accounts to make them current. Paying your creditors on time is the best way to improve your credit score.

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4. How important is the down payment?

People who are under financial stress will likely have a hard time scraping together a decent down payment. But the more “skin” you have in the deal, the more likely the lender is to bet on you. A large down payment may even motivate lenders to charge a lower interest rate. Financing involves risk. Lenders believe that the more equity (down payment) you have in your car, the less likely you are to default on your loan. Whether it's a home loan or a car loan, the lender considers 20% to be a reasonable down payment. The better your credit score, the more likely you are to be able to make a smaller down payment. However, if your credit is really weak, putting down a larger down payment can help convince lenders that you're serious about your finances. It will increase your chances even more.

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5. Where can I get a car loan?

No matter how weak you believe your credit is, it may be better than you think. Before you set foot on a dealer's premises, you'll need to contact various lenders to get pre-approved for a loan. Remember that a finance company is probably your best bet for securing a subprime loan. However, banks and credit unions are starting to look more favorably on borrowers with credit worth less than the pound. Don't exclude them in your search.

Even the lending arms of some automakers, such as GM Financial, are willing to finance cars for companies with bad credit. You will need to apply at a dealership with these automaker-owned financing companies. Still, it's good to get a rough idea of ​​the interest rates you can expect beforehand, as this will affect how much you can afford to pay for a car.

A last resort may be a “buy here, pay here” (BHPH) dealer. If you need to finance through a tote-your-note dealer, take some time to find one that works with credit bureaus. You will pay much higher interest rates than regular lenders. Therefore, you can also be sure to receive credit for on-time payments. Securing your next car loan will be easier and your next interest rate may be lower. If you search hard enough for the “buy here, pay here” option, you might find a franchise car dealer that deals in used cars in BHPH.

learn more: What is a buy here, pay here car dealership? Here's what you need to know about the last resort to buying a car.

This story was originally Autotrader.com.