If you have bad credit, then it may seem impossible to get an auto loan. But it is not impossible because there are bad credit auto finance offers out there if you can find them. In fact, most auto dealerships have business relationships with multiple financial lending institutions. Some of these institutions may approve people with bad credit and then just charge them a higher interest rate. It really depends on their exact credit score and how high a risk they are. Even if these two things are bad, there are always ways around them.
5 Ways to Get an Auto Loan with Bad Credit
Below are the 5 main ways you can get an auto loan with bad credit:
- Get a Cosigner – The easiest way to get an auto loan if you have bad credit or no credit is to get someone else to cosign the loan for you. This means that they are taking on the legal obligation to pay the debt of the loan in case you default on it. That way, the lender will feel better about issuing the loan because there is less risk of them losing money. The cosigner should have a better credit score than the borrower. In most circumstances, the cosigner will be a parent, relative, or close friend.
- Big Down Payment – People with bad credit will need to do whatever they can to impress the lender. Sometimes it helps to offer a big down payment on the auto loan because it will prove to the lender that you have money to spend. If you were to make little to no down payment and you have a bad credit score, it would be unlikely that any lender would take you seriously. But, a big down payment of at least 20% would certainly make them consider approving your loan.
- Purchase a New Car – This might seem strange, but lenders are actually less nervous about approving auto loans when the borrower purchases a new car rather than a used car. The reason for this is a new car will be more valuable than a used car if it has to be repossessed. Don’t forget that your car is collateral for the lender in case you default on the loan. They want to make sure they have something of value to make up for the lost money from the loan. Since cars are consistently depreciating in value, they need to save as much as they can get. So, they will more likely approve a loan for a new car rather than a used car.
- Shop Around – There are many car dealerships out there that accept customers with bad credit. You might see them advertise posts in the newspaper like “Bad Credit is Okay” or “Little to No Credit? No Problem!” These likely won’t be from big dealerships that already have a loyal customer base. You can expect smaller dealerships that are desperate for customers to post these ads. They have connections with lenders that will approve auto loans for people with bad credit and then charge them a high-interest
- Get a Preapproved Loan – You don’t always have to rely on the auto dealership to connect you with a lender. You should talk with your local bank or credit union and see if you can get preapproved for an auto loan. Some people with bad credit will even get preapproved for a personal loan and then just use those funds to purchase the car in cash. That way, they get the title to the car quickly while making monthly payments to their private lender.