So you’re ready to buy a new car, but there’s one big problem: your credit score. Your credit history plays a major role when buying a car, with everything from your auto loan to your purchasing power hinging on that sole factor. And if you have bad credit, you might wonder how you’ll ever be able to purchase a car at all.
Don’t let bad credit stand in your way – it’s possible to buy a car, used or new, with your current credit score. You just need to be informed and follow these five tips while shopping.
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1. Clean Up Your Credit Before Shopping
First things first: in order to know exactly what options are available to you while shopping for a new car, you’ll need to know where you and your credit score stand.
Before you begin looking at different vehicles, you’ll want to check your credit score. You’re able to get a free credit report once a year from the three credit reporting bureaus, but there are also online services like your credit card company that will let you see your credit score at any time. Get online and a look at your credit score so you know what you’re dealing with.
Once you’ve examined your credit score, it’s also a smart idea to take a look at your credit history. If you can, you’ll want to clean up your credit history as much as possible before starting to shop for a car. The more you’re able to clean up or repair, the more buying power you’ll have.
To clean up your credit history, you can:
- Pay off any past-due accounts
- Dispute credit report errors
- Limit the number of hard inquiries that hit your score
- Reduce any debt that’s bringing your score down
Additionally, you can take steps to try to better your credit score before you start shopping for your next car. Set a date to start shopping, and in the months leading up to that date, make sure to pay your bills on time, hold off on opening any new credit cards or loans, and avoid any obligations like bankruptcy or foreclosures.
2. Find a Dealership That Will Work With Your Score
When you’re ready to shop around and find the vehicle of your dreams, you’ll want to let your credit score guide you. If you have poor credit, you’ll be limited in your choices – not all auto dealerships will be able to work with your score, but there are plenty that will.
So, instead of simply heading to your neighborhood auto dealership, search online for dealers who typically offer financing for those with poor credit. This is especially important if your credit score falls below 600. As Credit.com explains, you’ll need to pursue specific car financing options for a score of 600 or less and you might require special loans that not all dealers offer. You can search online for these dealers, looking for those in your area who deal with customers of all credit levels or specifically lower credit scores.
3. Get Pre-Approved for a Loan
Because financing your next car will be a little tricky with poor or bad credit, you’ll want to secure your financing before you’re ready to buy. This has two important benefits for those who are struggling with their credit: you’ll know which cars you can afford and you won’t have to fight for auto loan approval.
Typically, those with excellent credit have no problem getting approved for auto loans right on the spot at dealerships. But if your credit is less than perfect, you could find yourself facing a denial at the dealership – so to avoid this, you’ll want to search for lenders who have no problem accepting borrowers with poor credit.
Make it easy and head right where you’ll find a loan with any kind of credit: the bank. You can talk to a local bank or credit union, as both of these financial institutions typically offer special auto loan rates for their customers. Both banks and credit unions will often offer pre-approval for auto loan borrowers, letting you go to the dealership with financing in hand.
4. Know What Interest Rate to Expect
In addition to securing financing, you’ll also want to check current interest rates on auto loans for those with credit scores like your own.
The amount of interest you pay, whether on a new or used car, seriously affects both your monthly payment and how much you wind up paying over the lifetime of the loan. High interest can quickly make a modestly-priced car unaffordable, and it could cost you thousands of dollars more in the long run.
And unfortunately, those with poor credit are typically offered the highest interest rates available. This is because lenders know that those with bad credit are less likely to make their payments and more likely to default on the loan entirely. To reduce the chances of this happening to you, you’ll want to calculate your potential interest and see if you’ll be able to afford the cars you’ve been considering.
According to Edmunds, the following interest rates are typically offered based on these low credit scores:
- 601-680: 7.1 to 10.4 percent
- 501-600: 11.4 to 16.9 percent
- 300-500: 14.1 to 19.8 percent
The interest will also depend on whether or not you purchase a new or used car. Surprisingly, used cars often have higher interest rates than new cars, but the different can be just a few points for nonprime, subprime, or deep subprime credit scores.
5. Only Shop for Cars You Can Afford
If you’re living with poor credit, there’s one shopping tip that can save you money and serious financial woes when buying a new car: stick to your budget. By shopping for and considering only cars that you can afford, you won’t wind up lowering your credit score even more. In fact, by making payments on a vehicle you can afford, you’ll be more likely to increase your credit score.
In order to figure out which cars are within your budget, you’ll want to consider these factors:
- The monthly payment you’ll make on your auto loan
- The down payment you’ll need
- Fuel and maintenance expenses
- Auto insurance, paid either monthly or annually
By focusing only on the monthly payment you’ll make on the vehicle, you’ll forget about plenty of other costs that come with car ownership.
Ultimately, when you’re ready to start shopping for a car, bad credit doesn’t have to stop you – but it can complicate matters. In order to make the process as easy and effortless as possible, no matter your credit score, follow these tips and do your homework before buying.