Why Credit Scores Matter

Before you dive into the loan process, it’s important to understand exactly what your credit score is and why it’s important.

Your credit score is a number between 300-850 that lenders use to determine whether you’re likely to default on a loan (defaulting means failing to pay). If your score is higher, a lender might be more willing to offer you a low interest rate or a larger loan.

Scores of 650 or lower are typically categorized as less-than-ideal. Your score might be low if you’ve missed payments, you have a lot of debt, or you simply haven’t opened any lines of credit. If you’ve got a low score, lenders will see you as a higher risk and they won’t offer you their best options. That could limit your ability to buy certain vehicles — and when you are able to find a loan, you might have high monthly payments.

Qualifying for a Car Loan with Poor Credit

The good news is that people with poor credit can still find vehicles at affordable rates. The trick is to know all of the factors that affect vehicle financing and compare as many options as possible before you buy. Some tips to keep in mind:

• Set a budget. Know what you can afford overall, both in terms of the overall price and your maximum monthly payments.
• Avoid hurting your credit. In the time leading up to your purchase, do everything you can to boost your credit. That means paying all bills on time, paying off debts in collection (when possible), and avoiding large purchases on credit.
• Ask someone to cosign. If a family member or friend is willing to cosign on your loan, you might be able to get a better rate. Be aware that if you cannot make payments, the cosigner will be obligated to pay.
• Look for bargains. While it might seem obvious, you won’t need as much financing if you find a great car at a low price.
• Research average interest rates. This will help you know what to expect. Be wary of any rates that are double the average or more — even if your credit score is low, you can avoid extremely high interest by shopping around.
• Plan for a larger down payment. The more you can pay as a down payment on a car, the smaller your loan.

You can also check with local organizations that might supply loans or vehicles. Some nonprofits have programs to provide loans to people with bad credit or no credit. While these programs aren’t available everywhere, they can be extremely helpful.

Look Online for Financing Options

Dealerships want to sell vehicles, and many cater specifically to people with credit issues. That doesn’t mean that you should sign the first financing offer you receive — if you have bad credit (or no credit), you’ll need to do plenty of research to make sure you’re getting a decent deal.

Online resources can be extremely helpful. Look for a variety of financing options from banks, credit unions, and other lending institutions. Consider getting pre-approved by 3-4 lenders. Typically, pre-approvals don’t affect your credit score, but applying for a loan might have a slight negative effect, so avoid applying until you’re ready to make a decision.

Some car dealership websites allow buyers to check for financing options through their associated lenders; this can be helpful, but before entering personal information into any forms, make sure that the website is doing a soft credit check. In other words, make sure you’re not applying for a dozen loans when you enter your info.

Research Carefully Before Buying a Car

Regardless of your credit score, buying a vehicle is a major financial decision. Don’t take it lightly — search online for as many options as you can find and compare rates, monthly payments, and lender reputations.

Collect information about loan rates and amounts. Keep detailed notes so that you can compare different financing options easily. If you can’t find pre-approved offers, you might need to adjust your budget, but most drivers can find options regardless of their credit.

Working with reputable lenders and dealerships makes this process much easier. The best way to find them is to dive deep into the research. If you understand the factors affecting your credit score and you’re willing to put in some work, you can find a reliable vehicle at a great price.