Best auto loans for bad credit in 2022
Fortunly’s Guide to Auto Loans
Getting a car loan when your credit score isn’t at its best can seem like an impossible task. Interest rates are skyrocketing and your choice of cars is often limited.
You’ve probably tried your local dealership, but if your credit score isn’t perfect, walk away empty-handed. Getting a co-signer for a better deal can easily turn into a relationship breakup, and interest rates often seem better suited to paying off a space shuttle than a car loan with bad credit.
Luckily for you, the sole purpose of this guide is to find ways for you to buy the car of your dreams, regardless of your credit score.
What constitutes a bad credit score for car loans?
As we’ve said before, there is no such thing as an unacceptable credit score for many car dealerships. The optimal credit score for buying a used car is around 600, so anything below that may seem like a disaster, but rest assured, it’s not.
Your credit score isn’t the only thing to consider when applying for a car loan for bad credit. The next most important thing lenders will look at is your debt to income ratio.
If you have a steady income from a job or other sources, this will go a long way toward your approval. In fact, people who have never owned a credit card in their life have been making regular payments for years.
Preparing all your documents before meeting with dealers, banks or intermediaries, and having an explanation for any potential shortcomings can be a crucial factor in getting approved for bad credit auto finance.
To sum up, “bad credit” is a term open to interpretation by almost all car dealerships. After all, the car serves as collateral, so they won’t lose much if you don’t make your payments on time. Dealers can take it back and resell it to cover their losses. However, it would be best if you found the time to improve your credit score before buying.
How Does Bad Credit Affect Auto Loans?
Some people think it’s impossible to get car loans with bad credit, but that’s very far from the truth. Still, while that doesn’t stop you from getting one or more, bad credit will impact the offers you receive.
Simply put, bad credit affects loan terms. To be more precise, the deposit you will have to pay will probably be higher than expected. The interest rates you will be charged could fluctuate wildly, possibly reaching very worrying heights. On average, people applying for car loans with bad credit end up paying interest rates four times higher than people with impeccable credit scores.
Loan terms have increased over the past couple of years, but that’s not as likely if you have bad credit.
How to get a loan with bad credit?
The process isn’t much different from trying to get one with good credit, but there are some things to keep in mind.
The lender will ask you for employment and asset ownership information, as well as the car you plan to buy, to determine the type of bad credit car loan you qualify for.
In short, get your paperwork in order, be sure to dispute any irregularities in your credit score or spend time improving it, and do your research online to find the best lender.
What to pay attention to?
There are many dealerships with “buy here, pay here” signs that claim to be able to finance anyone, regardless of their credit rating. It may seem like a good deal, but make sure the terms are reasonable. Interest rates of 20% to 30% are not uncommon for bad car loans, and you can rest assured that companies that charge that much don’t make a living selling cars.
If you accept these offers, you will have a hard time getting out of it. Most of these dealers are very aggressive with their repossessions, with some of them taking the car back after just one day behind on your payment. Repossessions can seriously hurt your credit score, which could lead to further long-lasting struggles.
It’s a better idea — practically mandatory, in fact — to get pre-approved bad credit car loans before you hit the dealership. With a fair and valid offer already in your hands, dealers might be incentivized to offer you a better one.
Another thing to watch out for when you have bad credit is the type of car you buy. You should opt for a car that will not make a huge dent in your budget, the price of which you can convert into reasonable payments. You don’t want to overwork yourself, so make sure you can pay off the bad credit auto loan.
Can a car loan help your credit?
Yes, by adding to your payment history and credit mix. However, some lenders do not report payments to bureaus, so it is crucial to check this before choosing one.
If you pay your bills on time, it will be a huge bonus for your credit score because payment history matters more than other factors. A loan can also be a welcome addition to your credit mix, especially if you’ve only had credit cards so far.
Anything that can improve your credit score deserves your attention, even used car loans with bad credit. Try to make your payments on time, create a plan to get rid of any debt you may have, and the next loan you take out will likely have much better terms.