Bad Credit Car Financing
7 Things You Should Know About Financing a Car with Bad Credit
Poor credit and buying a car can be a hard match. Here are seven things you should know about bad credit car financing, bad credit car financing companies and interest rates.
1. Know your credit score.
If you have poor credit, you may be all too familiar with your credit score. But knowing this number is the first step to obtaining bad credit car financing.
2. Understand interest rates.
Interest rates for someone with excellent credit will be lower than someone seeking bad credit car financing rates. Do your research and know the maximum interest rates allowed for your state. Shop around to find the best rate for your credit situation.
3. Be realistic.
Bad credit car financing isn't impossible. However, know what you can afford. Consider your income and how much your monthly payment can be. Find an economical and insurance-friendly car. A brand new car depreciates by 10 percent as soon as you drive it off the lot. Be smart and use your bad credit car financing to purchase a used car that will hold its value.
4. Be prepared.
Your bad credit car financing company will ask for documents like pay stubs and W-2s, utility bills, rental agreements, and possibly even personal references. Check online or call the dealer to get everything they will need.
5. Consider a trade-in.
If you currently own a car, consider trading it in to the bad credit car financing company and put the money toward a new ride. Depending on your state, there may be tax advantages for this course of action.
6. Ask someone to go with you.
Looking for a car is stressful, and bad credit car financing can be overwhelming. Bring a friend for an extra pair of eyes and moral support.
7. Pay attention to loan terms.
Make sure there aren't any hidden financing terms like purchasing add-ons or variable interest rates. Also be sure you can afford the monthly payment for the duration of the loan.
In-house Financing vs. Banks
Going to a bank to secure an auto loan isn't the only way to get behind the wheel of a new car. Dealerships also offer in-house financing that can be easier to secure, especially if you have bad credit. Dealers may be more willing to work with you and forgive a poor credit score than your own bank. Regardless of which route you choose, securing a loan with bad credit doesn’t have to be an intimidating process. (1)
Getting approved through a bank for an auto loan offers some buyers peace of mind. You don't have to worry about trade-in credits or contract terms like extended warranties. But there is a downside. Banks are rigid about their qualifying standards and require a better credit score than dealerships usually do.
Meanwhile, in-house financing companies can be more convenient even with bad credit. Car dealerships typically work with a wide variety of finance companies and can offer more financing options even with bad credit. Some dealers and financial institutions specifically help drivers with bad credit and work with them on used car financing rates. Buyers also save time by purchasing their car and securing financing all in the same place. With quick approval and financing, buyers can drive off the lot with a new or used car even with bad credit car financing. (2)
Down Payment Options
In-house financing usually offers low and flexible down payment options for car buyers. This holds true even for those worried about bad credit car financing rates, as dealers can help drivers find used car financing for a better vehicle. (3) Another option is to look at credit unions where membership is more flexible and relationship oriented than their big bank counterparts. These small member banks are more likely to work one-on-one with their members to come up with flexible options and a down payment plan.
Low Monthly Payments
Banks generally offer better financing terms than dealers because there isn’t a mark-up on their rates or a middle man to negotiate with. But in-house financing might offer special promotions, even with bad credit. A lower interest rate directly impact a loan's monthly payment and can prove more affordable. But what if you get behind on your bills or miss a payment? Your local bank may be more willing to work with you and come up with options to help keep your car. (4)
It's wise to shop around for the best auto loan and interest rates, just like you would shop around for the best vehicle. Whether you're buying a used or new car, check your bank's rates and ask if there are any upcoming promotions before going directly to a dealer. Your bank may pull through for you, but remember you have auto loan options even with bad credit. In-house financing could ultimately offer the most convenience and affordability for your needs.
How Much Car Can I Afford?
Determining the affordability of car payments is challenging even in ideal circumstances. When you have bad credit, it is even more difficult. That is why determining your payment to income (PTI) is so important.
What is PTI? PTI is a way to figure out how much you can actually afford to pay each month for your car payment. To arrive at your personal PTI, figure your average monthly income and divide it by the proposed amount of your total monthly payment. For example, a monthly income of $3,500 divided by a $500 car payment would equal a PTI just over 14 percent. As you consider your bad credit used car financing options, remember that most financial experts agree that your payment to income (PTI) should not exceed 20 percent of your net income.
Other Factors Affecting Your PTI
The bad credit car financing company you choose to work with may consider other factors when calculating your PTI. You may qualify for better bad credit financing rates if you make a large down payment or have low living expenses. Even when you qualify for better bad credit car financing options than you expected, it’s important to consider the total cost of owning a car. This means budgeting for expenses such as fuel, repairs, and insurance.
The bad credit car financing rates that you’re offered may reflect a higher interest rate based on your credit score. The good news is that keeping current with your bad credit used car financing payments will eventually earn you a higher credit score and better repayment terms in the future.
The Different Tiers of Bad Credit
Credit scores are split into tiers by bad credit car financing companies. Bad credit car financing rates vary depending on which tier of bad credit you fall into. In general, the higher the credit score you have, the higher the tier and the lower the bad credit car financing rates.
Tiers 1, 2, & 3
Tiers 1, 2, and 3 are reserved for credit scores 660-850. Some bad credit car financing companies will use terms like "A," "B," and "C" or even Platinum, Silver, and Gold. These credit scores range from good (660+) to perfect (850) and are eligible for average and above-average rates.
Credit scores in Tier 4 range from 620 to 659 and are considered average credit. If you fall into this category, you will most likely qualify for bad credit car financing, but the bad credit car financing company will take a deeper look into your credit history before approving you.
Tier 5 credit scores start at 580 and cut off at 619. These credit scores are considered subprime by bad credit car financing companies. It's possible that they may ask you for a co-signer or collateral before approving you for bad credit car financing. Loan rates will also be a few percentage points higher than the average interest rate.
A credit score between 500 and 579 falls into Tier 6. In this tier, most bad credit car financing companies will require a co-signer or collateral and will also have high interest rates.