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How To Buy A New Vehicle With Bad Credit


For example, someone with subprime credit (which Experian defines as scores of 501 to 600) received an average rate of 11.33% for a new vehicle and 17.78% for a used one in the second quarter of 2020, according to an Experian report. By comparison, the average interest rate on a 60-month new-car loan was 5.14% during that same period, according to the Federal Reserve.




how to buy a new vehicle with bad credit



Getting a car loan with a credit score of 500 could be tough, too. The Experian report shows that only 0.37% of new-car loans and 4.35% of used-car loans issued in the fourth quarter of 2019 went to people with credit scores of 500 or lower.


Coming up with a down payment isn't always easy, though, so you may consider delaying your car purchase to save for a larger one. Doing this could make you a more competitive applicant, lower the amount you owe and help you lock in a lower interest rate.


Once you have a preapproval letter in hand, it will not only help you understand which vehicles are in your price range, but you may be able to use a record of your preapproval to negotiate a good purchase price.


After you get all your affairs in order and you're ready to apply for a loan, it's important to first do some shopping around. If you're having trouble getting approved for a loan from a conventional lender, take a look at lenders that are known for working with people that have lower credit scores. These lenders may offer loans at higher interest rates, but they help those with poor credit scores get approved.


As you search for the loan with the best terms and lowest interest rate, you may end up applying with multiple lenders. As previously mentioned, each time a lender checks your credit because you've submitted an application, a hard inquiry will be recorded in your credit reports. By applying with multiple auto lenders in the span of two weeks, however, these inquiries get grouped together into one.


Before you apply for a car loan, it's important to become familiar with the various borrowing options you may have. Some lenders offer loans to those with poor credit, but others may not. Knowing how each lender works beforehand could save you time and energy in the application process. Here are the most common types of auto financing:


First, when you apply for an auto loan (or multiple loans if you try with several lenders), a record of your application (called a hard credit inquiry) will be listed in your reports. This shows that a lender checked your credit reports as part of the application process. This record remains in a credit report for up to two years, but might not have any impact on your scores after just a few months.


Do you have bad credit? Brand-new credit? If you do, getting a decent car loan can be tough. The good news is that with some guidance and a little patience, it should be possible to secure a fair car loan regardless of your credit situation.


You should start with your credit report to see how it would look to a lender. Run it at least three months before you plan on buying so you can take action on any outstanding items, recommends Rod Griffin, director of public education for credit reporting company Experian.


For example, if we use the average interest rate received by each group of borrowers with credit scores below 660, here's how those numbers work out in real life for a $17,000 used car with a 66-month auto loan:


The lender might want to see your name on a utility bill, rental agreement or mortgage statement that also shows your current address. Some banks may also accept cellphone bills. The lender wants to know where you live for a couple of reasons. First, it shows stability. A borrower who has lived at the same address for 10 years is likely to stay put, and banks like stability. The second reason is that the bank wants to know where to send the tow truck if the borrower stops paying and the vehicle needs to be repossessed.


Pro tip: Bring a copy of your credit report with you to the dealership. Having it available might help the dealership skip running your credit, which it would need to do to give you a ballpark idea of the approval you'll be offered.


Also, check with your bank or credit union. It might be more willing to approve you since you already have an established financial relationship. You might also try an online lender such as Capital One, which offers auto loans for people with a credit score of 500 and up.


When it comes to deciding the car you're going to buy, it helps to understand that loan companies do not view all cars the same way. Imagine two $12,000 vehicles: The first is a 3-year-old economy car with 45,000 miles. The other is a 10-year-old luxury car with 120,000 miles. Although both cars have the same selling price, they are more likely to approve the newer car with fewer miles.


Loan companies use a complicated formula when deciding which cars to finance, and the criteria can vary among banks. The vehicle's age, mileage, history, and the buyer's credit history all play a role in the financing equation. So if you're approved for financing, you may have to pick a car that gets a lender's OK, and it might not be the one you had your eye on. Prepare to be flexible. Also, that high APR you're going to pay may sting, but remember that for many buyers who are rebuilding credit, it's temporary.


"Generally, if somebody has made good payments for 18 months, assuming the customer hasn't created new credit problems, then there may be an opportunity to get a lower interest rate," said Martin Less, president of Nationwide Acceptance, a lender that works with people in the nonprime market.


Here is a hard truth about buying a car with relatively new or bad credit: You'll likely need a down payment. Most banks will require "at least 10 percent down payment, or $1,000, whichever is greater," Less says.


Dealerships that regularly work with credit-challenged shoppers will know which lender will be most likely to approve your loan based on your specific situation. Just as all buyers don't have the same level of bad credit, not all lenders have the same requirements. A dealer might need to place a buyer with a recent bankruptcy with a different bank than one he'd select for a buyer who has a low score because of a recent divorce. A dealer who knows where to send a loan can be key in getting a shopper approved.


Pro tip: Don't be afraid to shop around for auto loans. Often, shoppers with bad credit will jump on the first deal for which they are approved, no matter how unappealing it seems. That's understandable, especially if you've been turned down a few times in the past. But just because you've gotten an approval doesn't mean you have to sign a contract that makes you feel uneasy. If the deal you're offered doesn't sit right with you, keep looking. The reality is that if one dealership can get you approved, chances are good another dealer can, too.


"The most important thing [borrowers] can do is keep communications going," Less says. "Let the lender know what the circumstances are, and lenders will generally work with the customers through temporary problems."


A number of new-car dealerships offer their credit-challenged customers the chance to trade into another vehicle without a significant increase in their monthly payment provided they've made a year's worth of consecutive on-time payments. While it may be tempting to get out of a Nissan Versa and into a Nissan Altima, for example, you will be adding more debt to your next loan.


If you've done your credit homework, shopped within your price range and made all your payments, you've not only improved your bad credit but also set up positive finance habits that will serve you well for years to come.


Getting preapproved is more significant than getting prequalified. Walking into a dealership with a preapproval sets a firm budget for your purchase. From there, you can search for vehicles that fall within your purchase limit and dealers will know you mean business.


Many people focus on the interest rate and monthly payment when looking for an auto loan. However, the sale price of the vehicle is the most significant factor when determining how much you pay for a car. If you can get the dealer to come down on price, it can save you a lot of money in interest over the next several years. Use your preapproval letter as a starting point when discussing price with the dealership.


  • Financing a car can build your credit. It may initially lower your credit, because you've taken on your debt, but it could help increase your score over time. For it to build your credit, you need to make your payments on time. If you miss payments, financing a car will hurt your credit rather than build it."}},"@type": "Question","name": "Can you buy a car with no credit?","acceptedAnswer": "@type": "Answer","text": "Someone with no credit will face many of the same challenges as someone with poor credit. Your best options are to find a co-signer with established credit, increase your down payment, or see whether you qualify for any special loan programs. For example, some lenders offer special loans for college students and recent college graduates."]}]}] .cls-1fill:#999.cls-6fill:#6d6e71 Skip to contentThe BalanceSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.BudgetingBudgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps View All InvestingInvesting Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps View All MortgagesMortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates View All EconomicsEconomics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy View All BankingBanking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates View All Small BusinessSmall Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success View All Career PlanningCareer Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes View All MoreMore Credit Cards Insurance Taxes Credit Reports & Scores Loans Personal Stories About UsAbout Us The Balance Financial Review Board Diversity & Inclusion Pledge View All Follow Us




Budgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps Investing Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps Mortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates Economics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy Banking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates Small Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success Career Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes More Credit Cards Insurance Taxes Credit Reports & Scores Loans Financial Terms Dictionary About Us The Balance Financial Review Board Diversity & Inclusion Pledge LoansCar Loans12 Tips for Buying a Car With Bad CreditByLaToya Irby LaToya Irby Facebook Twitter LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She's been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books.learn about our editorial policiesUpdated on October 24, 2021Reviewed byThomas J. Brock Reviewed byThomas J. BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.learn about our financial review boardIn This ArticleView AllIn This ArticleWork On Credit Before Car ShoppingAvoid Additional Bad Credit ItemsCheck Current Interest RatesMake a Bigger Down PaymentKnow What You Can Afford to PayGet Pre-approvedSkip the ExtrasCheck With Nonprofit AgenciesBe Careful With Buy Here, Pay HereRead All the Paperwork.Don't Expect to Trade for a New CarWatch Out for ScamsFrequently Asked Questions (FAQs) Photo: The Balance / Lara Antal 041b061a72


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