How to finance a car with bad credit comes down to taking a few proactive steps. The fact is, you can find a car, finance it, and drive away no matter your credit woes. If you’re willing to do some shopping, be patient, with a little homework, you will certainly be able to finance a car that will work for you. Here are some practical tips and considerations for consumers with credit problems who are about to enter the car market.
1. Avoid being taken advantage of
Check your credit scores at least a month in advance of car shopping. Knowing your credit score before car shopping is the best way not to be taken advantage of. The big three credit bureaus, Equifax, Experian and TransUnion, by federal law, must provide you with a free copy of your credit scores once a year (though not your FICO score). Make sure all information in the reports is correct to ensure you receive the best terms on a loan. Check the reports for errors or negative information—especially that over 7 years old. If there are problems, go to AnnualCreditReport.com to get help in correcting the mistakes. After the corrections have been made, buy a copy of your FICO credit score. Whether you like it or not, that score is how your credit is measured. The score ranges between 300 and 850. High scores pay lower interest rates than those with low ones.
2. Avoid multiple credit checks
In the deranged world of credit scoring, every time your credit score is checked it goes down, whether you finance or not. When car shopping, it’s possible to go to several lots before you find the car that meets your needs. If you allow your credit to be checked at each lot, you will be negatively impacting your score. Though credit scoring aggregate modeling will, in time, count every credit inquiry performed by an auto loan lender within a 2-week window as one inquiry, it may not reflect that in the days that you’re shopping. Because of this, it’s important to only apply for auto loans when you are actually ready to take one out. Otherwise, you risk making your credit score problem worse.
3. Down payment
Don’t just think about buying a car. Plan for it. Put some money aside before you start shopping. By saving money to buy a car, a sizable down payment can sweeten the loan package and broaden your selection of cars to choose from.
4. Know your budget
When car shopping, stay within your budget. The extra money you have left over after paying your monthly bills is what you have to work with. That amount is not just for a monthly car payment, but your insurance as well. Determine that amount and stick to it even if you’re approved for a larger loan.
5. ‘Buy Here, Pay Here’ financing vs. traditional bank loans
Despite that BHPH dealerships receive a lot of negative press for how they finance cars, the truth is, the line these days between traditional ways that used car are being financed and BHPH financing is very thin. Unless you physically go to a bank or credit union for a car loan, bank financing of cars are arranged at the dealership where the car is purchased. In other words, it’s nearly all one-stop shopping wherever you go. Every dealer advertises, “We Finance” programs just as BHPH does, and guarantee the cars they sell for a number of given months and-or miles. The big difference is BHPH dealers are willing to finance credit-challenged borrowers where traditional lenders will not, and car payments must be made weekly or bi-weekly. BHPH rewards your on-time payments by reporting them to credit bureaus, thus improving your credit score.
Buying a car with bad credit has its limitations, but it shouldn’t prevent you from buying a car. Following these steps can help you save money and prepare you for your car shopping experience. Ultimately, you may not get the car you want, but you will certainly be able to get the car you need.