Car Finance

Buying A Used Car with A Bad Credit Rating

By Mike Richards Updated: 07/26/2022 Posted: 04/09/2018

One of the things that you quickly realize when you have bad credit is that financing opportunities are limited. Not many lenders want to touch a person with a bad credit history, which consists of a credit score below 620.

There are, however, a host of subprime lenders who actually competes to offer their services to people with poor to bad credit. Therefore, if you have bad credit, all is not lost since options exist both among and beyond traditional lenders.

But perhaps the most important question you need to ask yourself is how much financing you can afford to take on bad credit. Note that I did not say how much financing you can get from lenders. The last thing you want to do to on bad credit is to take loans you can’t afford to repay.

To avoid taking a huge loan to buy a new car, consider buying a used car instead. Used cars cost much less than new cars. Buying a used car is perhaps the most rational decision you can make when on bad credit. Used cars may not be as good as new ones, but they are still decent enough to get you through a difficult financial patch. However, you will need to shop around to ensure that the used car you finally buy is in excellent condition.

There a number of avenues available to a person with bad credit. These vary in terms of their appropriateness. Knowing what option to pursue depends on a number of factors as each bad credit case is different and unique. To secure auto financing for a used car on bad credit, there are a number of things you need to do first.


1. Evaluate Your Bad Credit Situation

One of the first things you need to do when looking for financing on bad credit is to evaluate your current situation and decide how much credit you can reasonably get. Sometimes your credit score may not be a true reflection of your actual creditworthiness. When evaluating your credit options, think of other sources of possible financing. For instance, you might be able to secure financing using a credit card. However, if you decide to go down this route, avoid subprime credit cards as they attract very high interests and will most likely hurt your credit score further.

The other thing you need to do is evaluate how bad your ‘bad’ credit situation is. Most of the time, your situation is never as bad as it seems. The aim here is to make sure you don’t make your bad credit worse than it already is. For instance, taking a loan you can’t afford so as to buy a new car is a bad decision that will only hurt your creditworthiness. The wise decision, in this case, is to buy a used car, which costs far less than a new one.


2. Be Ready To Pay A Deposit

Once you have found a used car that you like, you might consider putting down a small deposit so as to reserve it as you look for financing. However, exercise caution and don’t put down a deposit unless you are fully decided that that is the car you wish to purchase. Some car salespeople would be very keen to get you to put down a deposit so that they can tie you down to that car.

Since in most cases the deposit you put down is non-refundable, make sure you pay as little amount as possible, perhaps $100. The deposit acts as security for holding the car until you are ready to settle the balance and collect the car. In most cases, should you change your mind, you lose the deposit.

When putting down a deposit for a used car, be very careful not to sign a ‘subject to finance’ contract as the dealer may pressure you to take a loan facility he or she has arranged for you. Instead, you should consider adding the clause; ‘subject to the buyer getting enough funds to buy the car from [name of your preferred lender] by [date funds are expected]. Such a clause means that the car dealer cannot go shopping for financing on your behalf. Should your dealer offer to arrange financing on your behalf, have them appraise you regularly and only proceed to conclude a deal with your consent.

Ideally, you should secure financing before you commit to buy a used car. Securing your financing helps you to stay within your budget. It also puts you in a position to drive down the prices by negotiating as hard as you can. Always go for the most affordable auto financing and then proceed to buy the best used car you can get for your budget. Don’t sign an auto loan offer that is not appropriate for you.


3. Shop Around For The Best Prices

Subprime borrowers often feel pressured to take the first loan offer they can get. This is because they are conditioned to believe that their credit rating is so bad that anyone offering them a loan is doing them a favor. This is however not the case.

Besides getting the best available financing, shop around for a good quality used car at the most competitive prices. Visit at least three dealerships and negotiate for rock-bottom prices. The one thing you don’t want to do is to pay even a penny over and above what the car is worth. Your credit rating recovery depends on your ability to check new expenditure while at the same time working to improve your income. You cannot afford to spend more than you should.


4. Work On Improving Your Credit First

If all fails, work on improving your credit rating first before buying a used car. One of the best ways to improve your credit score is to settle or keep your credit card balances low. Another strategy you can apply is to pay off your debts rather than rescheduling or moving them around.

Debts don’t disappear until they are paid up in full. The quicker you pay them, the faster you will get out of debt. Don’t apply for new credit cards that you don’t really need. The quickest route to improving your credit score is by increasing your available credit. Work on increasing revenue while keeping your expenses at the barest minimum.

Another good practice to help you get out of debt quickly and improve your credit score is to put your monthly loan repayments on automatic repayments. Setting up auto payments ensures that you don’t default or get into late payments. Nothing hurts your credit score harder than a poor repayments history (actually, by up to 35%).

Having bad credit should not be a life-long sentence. Many options still exist for subprime borrowers who need auto financing. Although interest rates for subprime borrowers seeking auto financing are higher than the normal rates, you can still get the best deal possible if you do your due diligence. Always compare different facilities before settling on one. When you are on bad credit, you cannot afford to bump up your expenses unless when absolutely necessary. This is because getting into more debt without leveling up your revenues only ends up hurting your credit even more.