Are you planning to purchase a car, but your budget is tight? There are several ways to buy a vehicle through financing. One of them is to apply for auto loans. However, your credit history will play a significant role when applying for a car loan.
Financial institutions and lenders will check your credit score to determine your creditworthiness. A credit score is a three-digit number—between 300 and 850. Excellent credit scores range from 800 to 850. Good credit scores are between 670 to 739, while the lowest score of 300 indicates poor creditworthiness.
If you plan to apply for financing, they’ll use it to determine your qualification. A good credit score increases your chances of qualifying for an auto loan and may attract lower interest rates.
Financing A Car With A Poor Credit Score
If your credit score is below fair, purchasing a car through auto loans can be challenging. Most lenders will view you as a potential risk. However, you can take some steps to qualify for an auto loan even if your credit score is poor.
- Shop With Different Lenders
One of the best ways to finance a car with a poor credit history is to shop with different lenders. You can compare the amount you qualify from various financial institutions and their interest rates. It’s also one of the best ways to find an auto loan that best meets your needs.
You can consider various types of lenders when applying for an auto loan with a poor credit history. One of them is your current bank. If you have a strong relationship with them, applying for an auto loan is ideal. The bank already knows you and might not have any problem approving your loan even if you have a low credit score.
Another option is to look for online lenders. Today, several online car financing platforms specialize in auto loans for people with a poor credit history. You can search online and compare their interest rates.
Online lenders are an alternative option and offer the convenience of completing the process from the comfort of your home. Plus, the approval process is always fast. Once qualified, you may receive the funds within 24 to 48 hours.
Aside from that, you can consider a car dealership. Typically, car dealerships have already built robust relations with financial institutions. They can point you to a lender who can approve your auto loan. Did you know some car dealerships have programs or departments to assist people with low credit scores?
Another option is to opt for buy-here, pay-here dealerships. You may consider this option, especially if banks and online finance platforms reject your auto loan application. Most of these dealership forms don’t evaluate the creditworthiness of the borrower. However, they may charge higher interest rates than traditional banks and online finance platforms.
- Evaluate Your Credit Score
Before applying for an auto loan, checking your credit score is best. Most lenders approve your auto loan if your credit score exceeds 580. Once you review your credit score, find ways to improve it.
You can improve your credit score by checking your credit report for errors. If you identify any mistakes, you can dispute them to relevant agencies to have them corrected. Any incorrect information may damage your credit score, reducing your chances of qualifying for an auto loan.
Here are some ways to enhance your credit score:
- Pay your accounts on time
- Keep your credit utilization low
- Get a credit builder card
- Monitor your credit file for fraudulent activities.
Evaluating your credit score also allows you to get an idea of the amount of money you can qualify to borrow. Therefore, you can plan and identify other sources of finance to cover the deficit. It guarantees a smooth transaction when purchasing a car.
Building a positive credit score is crucial, especially if you plan to buy your car sometime later. That way, you can qualify for high loan amounts at a lower interest rate.
- Save For A Deposit
Another effective strategy to finance a car with a low credit history is to save for a deposit. Making a deposit when purchasing a car can help build trust with the seller and lenders. Most lenders may only approve your auto loan application if you make a deposit.
In most cases, lenders will want you to make a downpayment before approving the loan. It’s essential to consult your lender to determine what percentage they prefer for the downpayment. It can help you prepare the amount before financing your car.
Remember that making a deposit allows you to pay less interest. The higher the amount you pay as a deposit, the less you’ll have to borrow. Since your loan amount is smaller, your total interest will also be lower.
- Work With A Co-Signer
Working with a co-signer is another excellent way to finance a car with a poor credit score. A co-signer is a person with a stable source of income and a high credit score. They can be your friends, relatives, co-workers, or anyone you trust. You can tell them your situation and ask them to be your co-signer.
Meanwhile, the co-signer will be your guarantor, and they can help establish confidence in your lenders. They’ll pay your loan if you default on monthly instalments. But before you choose this option, ensure you evaluate your finances thoroughly. Assess if you can afford to make the monthly payments. Otherwise, you may also lose the trust of your co-signer and lender.
One of the many ways to buy a car is to apply for an auto loan. However, this option may work for you if you’ve got a good credit history. Fortunately, you can use several helpful strategies to finance a car with a poor credit score.
They include shopping with various lenders, saving for a downpayment, evaluating your credit score, and working with a co-signer. Ensure to weigh all your options before deciding to have better peace of mind while enjoying your new car.