When you have bad credit, it can be very difficult to obtain an auto loan, however there are some very simple steps that you can take that will allow you to re-establish your credit and allow you to purchase a new vehicle.
It’s important to know that if you have nonprime, subprime or deep subprime credit scores then you will have a much higher interest rate than people with better credit scores.
Step 1 – What can you afford? Before you decide on the car you want or need, you should sit down and go through your monthly budget. Make sure you understand exactly what you can afford to pay each month for a car and remember to factor in gas, insurance, tolls and taxes as well as the monthly cost of the car loan. Buying a used car is often a more financially viable option if you are on a tight budget. Find out what your credit rating is before you start shopping around. You can find out from companies like Experian or AnnualCreditReport.com, as this will give you can idea of which credit score category you fall into.
Step 2 – Save for a down payment Having a down payment for a vehicle is something that is essential if you have bad credit. You may see vehicles advertised as available with no down payment or very low down payments; however these are almost impossible for those with subprime or deep subprime credit scores to obtain. In real terms, you will need either a $1,000 deposit or 10% of the total loan as a down payment, whichever value is greater e.g. for a vehicle that has a $9,000 value, you will need at least a $1,000 down payment. For a vehicle that has a $14,000 value, you will need at least $1,400 as a down payment. You can also use an older vehicle as a trade-in to help reduce the cost of the down payment.
The higher the down payment or value of the trade-in, the less you will end up owing and the lower your monthly payments will be. If you can provide a down payment as well as a trade-in, you will find yourself in a much better position when it comes to obtaining credit, even with a lower credit scores.
Step 3 – Where to apply for the loan The first thing you should do is go to your local bank or credit union and try to obtain approval for an auto loan with them. If you can’t, then you do have other options available. There are some credit card companies that offer auto loans, and if you have a long-standing relationship with them, you might be able to get approval for an auto loan with them instead. If you have had an auto loan in the past that you have paid off, then you may want to talk to the bank or credit union that gave you that loan as they might be willing to offer you another.
If these aren’t options, then you can talk to your local dealership. Dealerships have processes to help get subprime loans approved and often have relationships with subprime lenders that help increase your chance of securing an auto loan.
Step 4 – Make sure you have all your documents in order You will need to make sure that you have pay stubs or 1099 forms that prove your income; otherwise you are unlikely to secure any type of financing. If you are in a tip-based profession, then bank statements that show a history of consistent income and deposits will help prove your income and what you can afford to repay.
You will also need paperwork that proves your residency. Any statement you have with your current address such as a mortgage statement, utility bill or rental agreement will be enough to prove your current address. If you are providing a utility bill, the more recent it is the better. Your name will need to be on the bill too. Any documents you provide will have to show that you are either still in residency (your rental agreement must show you are still living at the property) or be less than 30 days old in the case of a utility bill or mortgage statement.
You may also be asked for some personal references. Lenders will want names, phone numbers and addresses of people that can give you a reference.
Step 5 – Finding the right vehicle This may seem like it should be the first step in the process, but it is really best left until last. When you know what you can afford, have a down payment and have secured a loan you can look for the vehicle that fits in your budget and meets your needs. This will mean that you will need to shop around to find the best deal, but if you know, for example, you will need a truck instead of a mid-size sedan, it will help narrow your search dramatically.
You may be tempted to jump at the first offer provided to you, however, if one dealer is willing to offer you credit, then it is highly likely others will too. If you find that other dealers don’t offer quite what you were looking for, you can always go back to the first.
Getting your ‘dream car’ may also turn out to be something of a nightmare if you aren’t careful. Being offered the chance to own a 13 year old sports car with 150,000 miles on the clock for the same price as a 3 year old economy car that has 27,000 miles on the clock will not result in the same loan being offered or even that you will be approved for both loans. It is more likely you will get approval for the economy vehicle, not the sports car. You should also be mindful of the likely cost of any repair work on the vehicle you are buying as well as how reliable the vehicle is. Spending $7,000 on a vehicle for it to then cost $8,500 after repairs when you could have bought a $12,500 vehicle that doesn’t need any repairs is something to keep in mind, especially if you are on a tighter budget.
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Notice to New Hampshire Residents: If you are applying for a balloon payment contract, you are entitled, if you ask, to receive a written estimate of the monthly payment amount for refinancing the balloon payment in accord with the creditor's existing refinancing programs. You would be entitled to receive the estimate before you enter into a balloon payment contract. A balloon contract is an installment sale contract with a final scheduled payment that is at least twice the amount of one of the earlier scheduled equal periodic installment payments. Notice to New York Residents: Consumer reports may be requested in connection with this application. Upon request, you will be informed whether or not a consumer report was requested and, if it was, of the name and address of the consumer-reporting agency that furnished the report. Additional consumer reports may be requested with respect to any extension or renewal of this obligation.
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