Your credit history contributes greatly to getting you approved for an auto loan. Lenders also use your credit history to determine the interest rates that you will be charged and other applicable fees.
It helps when you have a good credit history since the interest rates are lower and the fees less punitive. On the contrary, if you approach a lender with a bad credit history, you will have to brace yourself for higher interest rates and fees. Whether you currently have a stable job with a regular income, bad credit can affect your chances of securing a car loan.
One’s credit can go bad due to a combination of factors. The most common, however, is the track record of high debts, late payments, repossessions, and bankruptcy, among others. Lenders look at such credit history and conclude that you are a risky candidate for an auto loan.
However, bad credit should not stop you from acquiring the car of your dreams. In any case, you only live once. You deserve a little comfort and convenience such as that provided by buying a new car, or a used car for that matter. To increase your chances of success, there are several things you need to be ready for when seeking an auto loan on bad credit.
1. Do a Thorough Self Evaluation
The first thing you need to do is to be as brutally honest as possible with yourself about your circumstances. Before you even subject yourself to credit inquiries by car loan lenders, which could hurt your credit score even further, do an honest self-evaluation. Carefully consider the chances of your loan application being approved and only proceed when you are sure that your chances are reasonable.
Scrutinize your credit inquiry report and try as much as possible to understand how you got here in the first place. Has anything changed since your last credit report? It takes time for a credit history to change from bad to good. Sometimes this can take two years to reflect on improved credit history. However, if you can demonstrate to an auto lender that your bad credit is on the mend, chances are that they will look at your application more favorably. Be as informed about your circumstances as possible before you approach a lender.
2. Be Honest And Upfront With Lenders
Most people don’t see lying or giving wrong information on a car loan application as a big deal. However, in some countries, if you lie and get caught, this is deemed as fraud. In any case, lying on a loan application form further endangers your chances of securing financing in the future.
The best policy, as the old adage goes, is honesty. But beyond honesty, you have to demonstrate to the lender that your bad credit is on the mend. You will also have to clearly demonstrate how you intend to repay the loan once you get it. Just like you were brutally honest with yourself, be likewise honest with the auto loan lender.
Lenders are human too. Some of them have gone through a bad credit patch and therefore fully understand your circumstances. However, if you are turned down by a lender, don’t give up. Move on to the next one and, again, be honest with them about your circumstances. Always remember that lenders have their own way of sharing information amongst themselves. If you deceive or try to deceive one, chances are that every lender you go to will be aware of your misdemeanor.
3. Check Your Credit Score And History
The main considerations that all potential lenders base their loan approval decisions on are your credit score and credit history. The default response to a bad credit score is to decline an application. Your credit history can be ascertained by conducting a credit inquiry on you. Once a bad credit verdict is given on you and a credit report to this effect produced, you should not just accept the report without questioning it as most people do. Scrutinize it for possible miscalculations or errors.
Only proceed to an auto loan lender after thoroughly understanding your credit score and history. Anything you can find that will strengthen your application should be brought to the attention of the lender. Play up your strengths while downplaying your weaknesses. For instance, in spite of a bad credit report, you could bring bank statements that prove that you have since the report been making regular payments. This will be an invitation to a potential lender to look past your bad credit and consider your changed circumstances and financial discipline.
4. Get A New Job
Losing your job may not hurt your credit score directly, but it will in the long run if you stay out of employment for prolonged periods. This will be reflected in missed payments, high credit card bills, and new accounts opened in an attempt to get funds to pay off your utility bills. This will, of course, have the undesired impact of damaging your credit score even more.
Conversely, getting a new job or an extra regular source of income will end up improving your credit score. Although this will take some time to reflect on your credit reports, you can approach a potential auto loan lender with this information. This will be an invitation to a lender to look past your bad credit and consider approving your application on the basis of your changed circumstances.
5. Shop Around And Avoid Scam And Payday Lenders
One mistake that most people make when they have bad credit is to be so desperate as to take any loan that’s offered to them. Don’t fall into this trap. Your circumstances are not as bad as you think. Avoid any lender that tells you ‘bad credit is welcome’ as this may be an invitation to exploit you with punitive interest rates.
Payday lenders, for instance, are notorious for charging prohibitive APRs and penalizing late payments besides charging additional processing fees. They can make your life a living nightmare, especially if you default on payment, by placing your account under delinquency and selling your loan to a third-party debt collection firm, which will hunt you down until you pay the loan. It’s not uncommon for third-party debt collectors to track a debtor down to their employer in a bid to recover their money. The high rates and the potential harassment by a debt collection agency are not worth the risk. Besides, they will most likely report you to a credit rating bureau and seriously affect your credit rating and future chances of securing financing.
Before approaching a lender for an auto loan, check online for reviews from past clients.
Some lenders are outright scammers and could leave you in a worse financial condition. Always do your due diligence to be sure that the lender you intend to approach is reputable.
While it is not advisable to seek car financing on bad credit, sometimes one may not have any other alternative but to bite the bullet and approach an auto loan lender. The interest rates and fees may be high, but your need for a car may override your better judgment of avoiding loans on bad credit.
You might also consider accepting that you may have to wait for better conditions before approaching a car loan lender. While this may be inconvenient for you since you might have to use public transport, you will nonetheless have embarked on a journey to good credit recovery and improve your chances of securing an auto loan with competitive interest rates.
Whatever decision you arrive at, don’t be overly desperate for an auto loan as this will expose you to exploitation and scams from lenders whose only interest is to fleece you and destroy your chances of getting credit in the future.