Owning a vehicle has become fairly essential these days. It could cater to your daily commute to work or school, dropping your kids to their school, finishing odd jobs around the town or plying for your business. Whatever your need, you would like to return triumphant from your vehicle shopping having purchased the vehicle of your dreams, the vehicle which meets your needs and not be turned down from this because the dealer or your auto financier finds you to have bad credit.
You can still finance your vehicle with bad credit and working towards that dream can end fruitfully for all involved; you - the consumer, the dealer and the financier. Ideally this is the kind of sweet deal we should be looking for. Before shopping for the loan, it helps to establish the actual need for a new vehicle. If you already own a vehicle on loan, getting its terms reevaluated might help you financially and also with your credit score.
Making a big payment as a down payment could help in decreasing the period or interest rate of that loan. It would also help assess if you would like to pick the new vehicle with the help of a loan. A loan would allow you to ration or budget your monthly income for all your needs without having to forgo things that help in the long run but are not able to afford their total cost with a single payment. A loan with regular payments would also help boost one's credit score while purchasing a vehicle with a down payment would not.
Once having mulled this over if you are sure that you still require another vehicle you should keep your views open for both new and used vehicles. Used vehicles might just be cheaper but can end up adding to the total cost of owning a vehicle with more frequent maintenance or breakdown issues. On the other hand a new car could work well with all involved in this deal. With a new car being more valuable, it is lucrative for the lender as higher collateral which can be reclaimed in case of irregular or non payments. It is also offers better options when we require selling it off.
Generally, a new vehicle would also require lesser and cheaper repairs compared to used vehicles keeping overhead costs lower. The dealer too profits from the vehicle sale with profit on the sale. If he manages to send you home happy with the vehicle as well as the financing deal, he stands a good chance of increased sales from referrals to our family, friends and word of mouth advertising resulting in more sales.
Regular servicing in their maintenance department are also a result of such sales and a source of income there. For the consumer and lender a well maintained vehicle will yield more profit when sold or refinanced.
One of the first things to do once you have decided to get a vehicle and a loan is to check your credit score and credit report. It would help in knowing your actual credit score and dispelling any confusion about where it stands. It would also help you get better loan options and not be duped into thinking that your score is worse than what it really is to get overcharged. You will see and understand the factors affecting your score and report.
Bad credit normally involves defaulting regular payments on loans or credit cards, late payments or maxing out the credit limit on your credit card. With this understanding you could make amends at the points which are weighing down your score like making payments for the ones showing late payment.
You could also correct mistakes in your report, thereby improving your score and getting yourself a better loan. If checking, making amends and correcting your reports is done a few months before your vehicle purchase, you stand to profit considerably. The credit score is not the only thing being assessed for your loan and people with the same score might be offered very different loan options. For example, a lender would prefer a person who has a history of regular payments over a person who has the same credit score but has never borrowed and does not have a history of payments at all.
The average interest available to borrowers with good credit is between 4 and 5%. Subprime borrowers pay an average of 10 to 13% on their loans. Since auto loans involve a lot less money than any other loans and is tenured over a shorter period of time and is the easiest to repossess compared to any other asset such as a house, the credit score that makes you eligible for a subprime mortgage loan, will fetch you a prime auto loan.
Steps to follow
- If you think you have a really poor credit score and will not be able to avail a loan, instead of going to the bank, visit the credit union first. It is wise to apply at a bank where you have a checking account or credit union. Also, check if your company or your insurance company offers any kind of auto financing.
- One must remember to look up sources of auto loans rather than lenders who cater to low credit customers. Always look for the cheapest money - lowest APR available over the shortest possible period. Don’t get carried away by promises of low EMIs over a long period of time. If you see that you are able to make the payment only if you take a long term loan, it basically means that you can’t afford the car and are going out of your means to get the same. Do not allow the loan to be contingent on purchasing after sales services, extended warranties or even insurance.
- If you are having your loan financed by a dealer, ensure that the terms of the loan are final. It shouldn’t be conditional or contingent at any given point in time before you sign the documents and drive your car away. This uncertainty may be the reason for changes in interest rates and EMIs in the future that you might not be able to mend at a later date.
- Make sure you show the financier a proof of your income so that it is established that you are employed and have a steady earning. Most dealers offer to trade up after a certain period of time without any missed payments. In such a scenario, you can opt for refinancing instead.
- It is also noteworthy to remember that you will be paying a higher rate of interest because your credit is bad. Therefore, it is always good to check with more than one lender on the rates that they are willing to offer.
- Once you have completed your credit research, and purchased within your budget and price range and made all the payments, you have established positive finance habits for yourself and improved your credit score to a very large extent which will serve you well in the years to come.