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Don’t Let Your Bad Credit Keep You From Buying a Car

Here are some smart ideas for working around bad credit when getting an auto loan.

If you have poor credit, it can be harder to get an affordable car loan. But it isn’t impossible. Preparation can be the key to offsetting your credit score and obtaining the car loan you need to get moving.

What’s Your Credit Score?
Your credit is a record of your financial habits – especially your history of paying your bills on time – expressed as a three-digit number. The best credit score is 800 or higher, but anything over 670 is considered good. There are several reasons your credit score might not be ideal. Your history of repaying debt could include some late payments, or you might have no credit history at all.

A lower credit score can make it more difficult and more expensive for you to borrow money. Lenders usually extend more favorable interest rates to people with better credit. Getting a car loan with bad credit is not impossible, though. Here are five steps to buying a car if your credit is less than perfect:

  1. Check Your Credit Report
    You’re entitled by law to one free credit report every 12 months. Your credit report contains information about your credit accounts and payment activities. It is the first place a lender will look to determine your creditworthiness. Check your credit report at to be sure it is accurate. You don’t want someone else’s mistake to hurt your chances of getting a loan. If you find an account that you didn’t open or some other error on your credit report, dispute it immediately.
  2. Figure Out a Monthly Budget
    Put together a budget by listing your monthly expenses, including a reasonable estimate for variable costs like groceries and entertainment. Subtract your expenses from your monthly income to get an idea of how much you can afford to pay each month on a car loan. Many finance experts recommend that you spend no more than 20% of your income on all your transportation costs. That will include 10% for your regular car payment as well as 10% for insurance, gas, and maintenance. If you don’t have 10% of your income available for car payments, you’ll need to either adjust your budget or adjust your expectations.
  3. Save for a Down Payment
    A larger down payment can help you secure a better interest rate and lower your monthly costs. Use your budget to determine how much money you can save each month toward your down payment. It may be hard to give up your lattes or your favorite streaming service, but making coffee at home and limiting your viewing options could help you save for a car loan down payment faster. You’ll want to have at least 20% of the cost of the vehicle as a down payment to get the best rates.
  4. Get Pre-Qualified
    A lender will check your credit and income and tell you how much you can afford. Getting pre-qualified is not the same as getting loan approval, but it is an important part of the planning process. Knowing how much you can afford to spend will allow you to fine-tune your budget and set a solid savings goal. Knowing what you have and what you can probably count on from a lender can take some of the stress out of car-buying.
  5. Shop Around
    When you have your down payment saved up and you know how much you can expect to borrow, shop around for the right car. You don’t need anything fancy. Just look for a vehicle that’s a good deal that fits your budget and will be reliable transportation. Don’t forget to estimate how gas and insurance costs could impact your monthly budget and consider when the car could be due for extensive maintenance.

Budgeting, planning, and saving can help you show your lender that you are a good risk. Preparation can also help you choose a car loan that fits into your budget and helps you improve your credit score. Here are three additional tips to keep in mind:

  1. Get a Cosigner
    If you’re just starting out and have minimal or no credit history, consider asking a family member with strong credit to be a cosigner on your loan. Cosigning means they agree to repay the debt if you default on the loan, but they will not have ownership rights to your new vehicle. Adding someone with a higher credit score to your loan application reduces the risk for your lender and can get you better interest rates and terms.
  2. Boost Your Credit
    If you’re looking to boost your credit, pay your bills on time and pay down high-interest debt as much as possible. Increasing your income to improve your debt-to-income ratio can help increase your available credit. You can also look into credit-building tools – like secured credit cards that add qualifying payments to your credit report.
  3. Be Alert for Scams
    And lastly, be alert for potential scams and rip-offs when considering where to buy and finance your car. Do your research and make sure you aren’t being taken for a ride. Watch out for exorbitant rates, unneeded extras, and unclear contract terms. Dealer financing deals that seem too good to be true usually are. Stick with lenders you are familiar with.

Ready to Take the Next Step?
Contact your trusted financial institution to learn more about choosing the right car loan for you and your credit.