How to finance a car when you have bad credit

Here's the truth about getting a car loan: Lenders make money by making loans. They don't just want to finance cars, they must finance cars to survive. Your goal is to find a lender that wants to finance your next car by presenting yourself as “low-risk” as possible. Read on to learn the five keys to doing just that.

1. How do I get my credit score?

Your credit score is a snapshot of your creditworthiness at any given moment. It can change from week to week or from month to month. If you haven't checked within the past six months, do so before shopping for a car loan. It's the first piece of information the lender takes into consideration. It serves as the best initial tool a lender uses to determine your credit status and the interest rate you qualify for. There are many legitimate online sources for getting your score, such as Experian's free credit score. Many credit card companies provide free credit scores to cardholders.

Credit scores for car loans

Borrowers in Experian's Subprime and Deep Subprime categories often had a significant impact on their credit at some point in the recent past. Subprime borrowers have credit scores ranging from 501 to 600; Deep Subprime Category Under 500. Loans sent to collection, bankruptcy, or home or car repossession can put the borrower in one of the lower credit score categories.

The good news is that auto financing isn't just available to those with gold-plated credit. However, lenders issued fewer car loans to those with weaker credit in 2023 compared to the previous year. The latest available data shows that these two categories of borrowers obtained about 14% of all new and used car loans in the third quarter of 2023.

Borrowers in Experian's Near Prime category are down after a slight uptick in the past two years. These are borrowers with a credit score between 601 and 660. In the third quarter, they took out about 17% of all new and used car loans. This percentage decreased from approximately 18.33% in 2022 and 18.61% in 2021.

Plus: 19 ways to save money when buying your next car

2. How can I obtain my credit report?

While a credit score is a snapshot of your current credit health, a credit report provides your credit history, including previous and active loans, and whether you pay on time. It will also show any loans that have been foreclosed, gone bankrupt, or have been repossessed. Three main credit information agencies – Experian, TransUnion TRU,
-0.17%,
and Equifax EFX,
+0.41%
– Collect information from lenders to build your report, which they provide to lenders upon request. You need to know what's in your report before a potential lender sees it. You are entitled to one free report per year from each agency. Request your report and use it as a roadmap for fixing any negative information.

See also: Here are the 10 cheapest new cars of 2024

3. How can I raise my credit score and submit a report?

Never take for granted that lenders have provided the three credit reporting agencies with accurate information. They make mistakes. Each agency has its own procedures in place for disputing misinformation. If you find an error on your credit report, file a formal dispute with the reporting credit agency yourself. You should do this with every agency where misinformation appears. They don't talk to each other.

Take the time to do everything you can to remove any legitimate negative marks on your report. Pay off the balances in collections, and pay off all accounts to make them current. Paying your creditors on time is the best way to improve your credit score.

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4. How important is the down payment?

Anyone under financial pressure will likely struggle to put together a good down payment. However, the more “skin” you have in the deal, the more likely a lender is to take a risk on you. A large down payment may motivate the lender to charge a lower interest rate. Lending is all about risk. Lenders believe that the more equity (down payment) you have on a car, the less likely you are to default on the loan. Whether it's a mortgage or a car loan, lenders look at 20% as a reasonable down payment. The better your credit, the more likely you are to make a smaller down payment. However, if your credit is really poor, depositing more will help convince the lender that you are serious about your money. It will further improve your chances.

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5. Where can I get a car loan?

No matter how poor you think your credit is, it may be better than you think. Before you set foot on a dealer's lot, you should approach various lenders to get pre-approved for a loan. Remember that finance companies are probably your best chance of getting a mortgage loan. However, banks and credit unions are beginning to look more favorably on borrowers with less than sterling credit. Don't rule them out in your search.

Even the lending departments of some automakers, such as GM Financial, are open to financing a car for those with weaker credit. You'll have to apply with the automaker-owned finance companies at the dealership. However, shop around beforehand to get a general idea of ​​what interest rate you can expect because it affects how much you can afford when purchasing a car.

Your last resort may be a “buy here, pay here” (BHPH) merchant. If you need financing through a stock dealer, take some time and find someone who works with a credit bureau. You will pay a much higher interest rate than a traditional lender. So, you can also ensure that you get credit for your on-time payments. It will make securing your next car loan easier and may earn you a lower interest rate next time. If you search for buy here, pay here options far enough, you may find a franchised car dealer that does BHPH deals on used cars.

Learn more: What is a buy here, pay here car dealer? Here's what to know about this last resort car purchase.

This story was continued in the original Autotrader.com.