Even With Bad Credit, Auto Loans Are Still Attainable

If you’re struggling to overcome a bad credit score, you may feel like it’s completely out of reach to get an auto loan.

However, even for people with bad credit, auto loans are still a possibility. In fact, a 2012 study conducted by Experian Automotive found that more and more people with bad credit are successfully getting auto loans.

Why Is It Easier?

The Experian study shows that bad credit seems to be less of a deterrent to lenders in recent years.

In fact, enough people with bad credit are getting approved that the average score of auto loan recipients has been pulled down almost to pre-recession (2009) levels. Even though many sub-prime auto lending companies probably didn't have the funds to approve these loans just a few years ago, they are now able to approve loans to more and more people.

This shift doesn't just reflect the levels of credit scores that are being approved for auto loans. Auto lenders are actually making significantly larger amounts of loans, which means that there’s more money to go around!

Even better, many of these loans are based on lower monthly payments, which make them much more accessible for most people with bad credit.

Cars Are Good Collateral

Bad credit auto loans are much easier to secure than other loans because they are usually for relatively small amounts. Plus, it’s easier for a creditor to repossess a car and get some sort of collateral for an unpaid loan than it would be for something else, like a home loan, explained The Simple Dollar.

This makes car loans less risky than a personal loan or another kind of loan.

Additionally, if the loan is for a new car rather than an old one, the collateral at risk is more valuable. This is beneficial to the lender if the borrower winds up not being able to keep up with payments.

New car buyers also signal to some lenders the borrower is serious about his or her commitment to the loan. If the car is worth more, some creditors believe borrowers will work harder to keep it, and will therefore do their best to pay off the loan on time.

Repeats & Referrals Are Worth It

Borrowers might not realize this, but many creditors want to lend to brand new clients, even if they are riskier. This is because lenders need to build new relationships with clients who are likely to either come back for another loan later on or recommend the lender to friends and family, Edmunds.com explained.

Referrals can give a lending agency a pretty good boost.

Because of this, some lenders will even give borrowers with poor credit a loan for a brand new car in hopes that the relationship will bring in more revenue down the line.

“Half the time, we’re not making any money on the deals,” Rinaldi Halim, general manager for Southern California dealership Nissan of Duarte, explained. The company prides itself on its willingness to take on clients in all credit tiers. “We want to have a relationship with that customer.”

High Interest Rates Cost More

If a borrower believes it will be near impossible to find a loan, he or she might enter the search willing to take any loan offered.

Some creditors will increase the interest rate above the average for other subprime lenders, Bankrate explained.

High interest rates mean more money for the lender, but they could also make a loan less affordable to the borrower. This decreases the chances of being able to keep up with payments.

This can damage your credit even further, making it even more difficult to find a loan next time one is needed.

Should I Go For A Loan?

So is it time for you to ask for an auto loan, even if you don’t have a good credit score?

One of the most important things to consider is how capable you are of keeping up with monthly payments. Demonstrating your ability to pay off your monthly bills looks good on your credit report. However, if you get an auto loan and fail to stay on top of your monthly payments, you credit report will suffer and you’ll have to deal with greater debt.

How To Get An Auto Loan With Bad Credit

Before you begin to consider different bad credit auto loans, you need to do some research and prepare yourself for the process of getting a loan with a bad credit score. Make sure to take the following steps before you talk to a lender:

• Find out your credit score: This one is a little obvious, but knowing your credit score can go a long way in preparing you to deal with a lender. Visit annualcreditreport.com to get a summary of your three different credit reports, but take the time to discover your actual score as well.

• Don’t assume anything: Even if your credit score is abysmal, don’t be afraid to go talk to a lender. You may be surprised at their willingness to approve your auto loan!

• Save your money: Especially if you’re dealing with bad credit, auto loans are much more manageable if you can make a sizable down payment.

• Don’t forget to consider the interest rate: With bad credit, the interest rate on your auto loan will likely go up significantly, which can increase your overall expenses. Do some research to find out what the common interest rates are for your credit range.

• Focus on used cars: If you choose to work with a respected used car dealership, you can often get a better bang for your buck and know that you are in good hands.