Car Finance

Securing Car Financing with Bad Credit

By Mike Richards Updated: 07/09/2022 Posted: 04/05/2018

So, you have bad credit? Well, you are in good company. There are a lot of people in the world who have bad credit. This, however, does not mean that they have no access to financing from lenders. For instance, in the USA alone, out of 220 million people with any kind of credit score, 68 million of them have bad credit, a staggering 30%. This is a huge market that no lender would want to ignore, especially those that deal with subprime auto borrowers.

The reality today is that there are more people in bad than in good credit. Having a credit score of any kind, bad or good, is an achievement by itself. This is because a majority of people are outside the credit score bracket, which means they have no access to financing from formal lenders. Besides, literally, everyone is indebted in one way or the other.

Knowing Your Credit Score

The first step towards securing car financing is to know your credit score. Although a hard credit inquiry may further hurt your chances of securing a car loan, monitoring your credit score via a soft credit inquiry will not hurt your credit report.

It’s always a good thing to know your credit score before approaching an auto loan lender for car financing. If you already know that you have bad credit, you will approach an auto loan lender with this information and perhaps avoid a hard credit pull being conducted on you.

In any case, even if you have bad credit, your actual credit score can affect your chances of securing a car loan. Since lending money involves risk, a credit score is the most reliable information that lenders rely on to determine your risk rating. Depending on your risk profile, calculated from your credit score, the lender then determines what loan terms to apply to you.

Some lenders may decline your auto loan application if they consider your risk profile to be too uncomfortable for them. Many others, however, exist for clients just like you. Subprime lenders understand that there are a lot of people with bad credit who nonetheless are able to finance an auto loan. They are likely to charge higher interest rates and fees than other risk-averse lenders, but at least they won’t turn you away just because you’ve got bad credit.

What You Can Do To Repair A Bad Credit Score

Having a bad credit score now does not mean you are condemned to this status forever. There are measures you can take to start the journey of recovering from a bad credit rating. One of the things you should consider is debt consolidation. The other is reducing the number of hard credit inquiries conducted on your accounts.

While the journey to credit score recovery may take some time, making the following fiscal changes in your life will help you chip away at bad credit and move you closer to recovery.

  • Make regular monthly payments to improve your credit history. While recovering from a bad credit score, the last thing you want is to hurt it further by defaulting or making late payments. Ensure that your monthly payments are paid whenever they are due. This is critical to the recovery of your credit rating.
  • Keep your debt to credit ratio as low as possible. This is not the time to pick up new debts if you can avoid it. As a general rule, keep your balances as low as possible and maintain your debt levels at below 30%.
  • Avoid opening too many new credit accounts. Instead, have one or two accounts for a prolonged period since this helps to improve your credit rating. If you hop from opening one account to another, credit reports will pick up this behaviour and hurt your credit score even further.
  • Avoid picking up new credit. You should limit the number of times you apply for credit to the basic minimum. In other words, avoid taking on new credit unless it’s absolutely necessary to do so. Frequent applications for credit hurts your credit score.
  • Be frugal in your spending and cut back on all unnecessary spending. You might also consider paying your credit cards and then shred them to avoid incurring new debts. Also, use any savings you pick up to pay off some of your debts. This fiscal discipline alone will get you out of bad credit pretty quickly. However, this should not be a knee-jerk reaction. A lot of discipline and commitment over a prolonged period will be required.
  • If your credit score is really bad, besides attacking it with all the above methods, you might want to get the services of a credit counsellor or specialist. They will guide you in your journey towards credit score recovery.

Although the steps above are guaranteed to get you out of a bad credit situation, as your credit score improves, be very careful about taking on new credit. Your credit score went from good to worse for a reason. Avoid repeating the same mistakes that landed you in the credit score ditch in the first place.

Shop Around For Cheaper Cars

Your credit score may not allow you to get financing for that top-of-the-range brand new car you’ve been dreaming about, but you can still get the same comfort and functionality from a used car. Some of the best places to identify good used cars include car auction sites that sell second-hand vehicles and salvage cars that have been reconditioned to look and function almost as good as their brand new equivalents. In some cases, almost-new used cars attract better financing than brand new ones. In any case, used cars cost far much less than new ones, which reduces the potential risk to a lender and also means easy and affordable monthly payments to the borrower.

Consider Leasing

If after evaluating all of the above possible scenarios you still can’t get a car loan on bad credit, you might have to consider leasing one. Leasing a vehicle has its own advantages. Among these are:

  • Easier monthly payments without the worry of paying the principal.
  • Getting to drive the car during its prime functional age, and in most cases the latest model. Besides, the car will most likely be under the manufacturer’s warranty, which comes with a number of benefits such as free oil changes and maintenance.
  • Being able to drive a car that you could not  otherwise afford.
  • You don’t have to worry about the car depreciating, its resale value or trade-in options. Once your lease term expires, all you have to do is to return it. You could then enter into a new lease and within a short time drive out in a brand new top-of-the-range car.

You should never take a bad credit score to mean you cannot access financing for a new or a used car. The fact that you have some sort of credit score, however low, already puts you ahead of many others who have no access to credit of any kind. In any case, there are auto financing options you can still take advantage of even when your credit score is below the 600 points red line. And when push comes to shove, you can still drive your dream car under a leasing arrangement.