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Seven Tips for Financing With Less than Perfect Credit

Are you looking for financing but have less than perfect credit? Getting a car loan with bad credit won’t be the easiest thing you’ll ever do, but it’s possible. Repairing your credit by paying off old debts and establishing a pattern of responsible credit card use may be a better way to approach a major purchase like a new car, but it takes time. The following tips may help you get there faster.

Tip #1: Know the Costs of Bad Credit

If you need a car sooner rather than later, there are still things you can do to help secure a loan—even with poor credit. Lenders look at your credit score as an indicator of your ability to pay back a loan. Lower credit scores represent higher risk, and they’ll offset that with higher interest rates.

That can get pricey—someone with a credit score of 550 can expect rates six to nine percent higher than someone with a score in the fair-to-good range. Based on an average new car loan amount of $27,000, that’s an added cost of almost $6,000 over the duration of a 60-month new car loan. It’s important to account for these added costs when deciding how much you can afford.

Tip #2: Set a Budget

The monthly loan payment isn’t the only cost associated with owning a car. Fuel costs, maintenance, and any fees or taxes you’ll have to pay should also be taken into account when deciding how much you’ll need to borrow. Take care to avoid a car that costs more than it’s worth—or more than you can afford.

Factor in things like the reliability of the vehicles you’re shopping for and how much you can expect to pay on repairs—as well as on things like car insurance. It’s a good idea to compare car insurance quotes ahead of time for a clearer picture of your total monthly expenses.

Tip #3: Time Is Money

infographic about financing costs with bad credit

Auto loans have variable terms. A longer-term loan can lower your monthly payment—but not the total cost. A six- or even seven-year loan means you’ll pay much more in interest over the life of the loan. You can avoid some of this interest by paying off more than the minimum required payment each month.

This can help you avoid paying more in interest over a long-term loan, but be careful not to feel too optimistic about your spending power, and talk to your lender about any fees or penalties that might apply for early payment.

Tip #4: Know Your Score

Check your credit score before looking for a car loan. You can get a free credit report once a year, and it’s a good idea to go over that information whether or not you’re looking to borrow. Credit reporting agencies sometimes make mistakes, and inaccurate debt, collections, or delinquent account information on your report will negatively impact your score.

You can dispute any errors (the process is free) and getting rid of incorrect information is likely to raise your credit score. A higher score can make getting a loan easier and with better rates that can save you thousands, so it’s worth it to be sure your credit report is accurate before approaching lenders.

Tip #5: Consider Co-Signers

If you’ve exhausted other options and are still looking at poor approval odds or higher interest than you can realistically afford, there’s another option that can help you qualify for a loan with a lower interest rate—and lower monthly payments.

You may want to ask a family member or close friend to co-sign on a loan. If they have good credit, you’ll have better chances of getting approved and will likely be offered lower interest rates. Your co-signer will be agreeing to make payments if you can’t. Co-signing is likely to affect their credit rating as well, so it’s a big favor to ask, but it can make a significant difference.

Tip #6: Comparison Shop

Loans are like any other product or service—you’ll be able to find a better price if you shop around. Different lenders will have different rates and terms, so comparing your available options is a good idea. You may wish to start by looking at online lenders.

Some online-only companies specialize in working with people who have bad credit and allow you to apply for prequalification via their websites or app. Prequalification isn’t a guarantee that you’ll get the promised loan at the estimated terms, but it will give you some numbers you can use as a starting point.

And don’t overlook the bank or credit union you may already be using, who may be more likely to approve a loan for current account holders. They have a more accurate picture of your financial health and might be more willing to work with you based on an existing relationship.

Tip #7: Finance Through Dealerships

Lastly, you can try securing financing through a car dealership. Dealerships generally work with a number of banks or other lenders and may be able to find options that wouldn’t otherwise be available to you. Many dealerships have special financing departments in-house that work specifically with people who don’t have great credit.

You’ll want to be wary of “no credit check” dealership offers. These kinds of “buy here, pay here” financing offers are made by the dealership directly to people with poor credit—but the interest rates are likely to be much higher than any other options. If you need a car right away and have exhausted other options, this might be a good last resort, but bear in mind it will be expensive.

Bonus Tip: New… or New to You?

Even with bad credit, you’re likely to find financing options, but the rates and terms you’ll be offered won’t be great. You’ll end up spending much more, and this will hamper your ability to pay down existing debts and improve your credit score. You can end up “upside-down” on a car, owing more than it’s worth.

Consider looking for a reliable used car that meets your needs. It will be much more affordable and would require you to borrow much less. Smaller loans tend to have better terms, and as you pay it down, you’ll be improving your credit. This may enable you to refinance your loan at a better rate or even trade your used car in for the new car you had in mind—but with better credit and better terms.

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