They say there are three necessities in life: food, water, and shelter. You can add a fourth necessity that operates on four wheels and comes with a hefty price tag.
Unless you take public transportation or live in a building above where you work, you need some type of vehicle to get around town.
Buying a vehicle represents one of the costliest purchases you can ever expect to make. The price of a new car can run tens of thousands of dollars, while pre-owned cars put a significant dent into the monthly budget as well. If you saved enough money for a down payment and then some, then good for you. However, you are part of the consumer minority, as most consumers finance new and used car purchases. According to the Federal Reserve Bank of New York, a record 107 million Americans have assumed some form of auto debt.
Of the millions of Americans who take out auto loans, a large percentage apply for financing with bad credit scores.
Overview of Bad Credit
By requesting a free credit report from one of the three major credit reporting bureaus (Equifax, Experian, TransUnion), consumers receive credit status reports that include credit scores ranging from 300 to 850. Poor credit sits at the 300 end of the range, while consumers who enjoy excellent credit score above 750. Several factors contribute to the calculation of credit scores, including the amount of delinquent debt, the amount of creditor charge offs, and the number of credit applications submitted within the past year. Every lender defines good and bad credit differently, but the differences are only a few points either way.
The ramifications of bad credit begin with denial of credit. Bad credit scores and histories automatically cause concern for creditors that would rather take less of a risk by lending money and extending credit to consumers who demonstrate a consistent history of paying back debts. Consumers with bad credit might receive approval of a loan, but they can expect to pay high interests rates and additional financing fees.
Hard times can affect just about anyone. However, a downward spiral into bad credit is not the end of the world. Although it takes time to rebound from bad credit, you can accomplish your financial goals by adhering to sound principles such as living within your means and paying more than the minimum owed in debt every month. One of the most effective ways to rebuild your credit score involves applying for a secured credit card. You send a lender money to establish a line of credit. You can never exceed the credit limit, but eventually, paying off monthly credit card bills increases your credit score.
How Does Bad Credit Affect a Car Loan?
We know how bad credit influences a credit card rate, but how does bad credit affect a car loan? Once again, bad credit means you pay more interest each month to compensate lenders for assuming the risk of accepting you as a debtor. The interest is the amount you pay in addition to loan principal each month. Bad credit for car loans means one indisputable math truth: the lower your credit score, the more your monthly interest payments.
Lenders can limit how much consumers with bad credit can borrow, which limits the variety of vehicles you can buy. Bad credit also restricts the features you want to add to a standard model vehicle. Consumers who possess bad credit typically have to make higher down payments to secure financing. Bad credit produces the classic economics Catch-22: You need more money for a down payment, but you do not have the money in the bank.
How do you secure auto financing with a less than stellar credit score? The answer lies in reviewing the best bad credit auto loans of 2018.
Here's the Best Bad Credit Auto Loan Companies:
Auto Credit Express
If you have bad credit, you want to work with a lender that specializes in approving auto loans for applicants that have bad credit, as well as no credit and at least one past bankruptcy. Auto Credit Express not only approves loans for credit risks, the company also approves loans for older models that have racked up thousands of miles. With bad credit, your sole option might be opting for an older car that traditional lenders refuse to finance.
You can receive approval for a bad credit auto loan and pay just $500 out of pocket for a down payment. Auto Credit Express is ideal for consumers who do not have much, if any cash liquidity. Consumers must prove they have a steady income, with take home pay before taxes of at least $1,500 a month. You can expect to answer several questions pertaining to your employment and compensation. Another upside is the online application takes three minutes to complete.
Capital One
What’s in your wallet?”
The memorable Capital One catchphrase appeals to consumers who enjoy above average credit histories. How does the popular credit card company handle consumers with bad credit? Capital One places a few restrictions on the type of car you can purchase, such as costing no more than $40,000 and coming with a manufacture date after 2007. Car mileage cannot exceed 120,000 and you can only drive the vehicle for personal use, not for commercial reasons like Uber or working as a courier.
Capital One also presents a list of participating dealerships, which limits your options a bit. The upside to the restrictions is you work with a big time lender that does not charge loan shark interest rates or requires an exorbitant down payment. Signing on the dotted line with Capital One represents one of the fastest ways to reestablish strong credit, that is, if you make your monthly payments on time.
Carvana
As an online dealer, Carvana offers subprime financing for consumers with bad credit. You shop for the make and model you want and after approval of a loan, Carvana makes arrangements to deliver the vehicle to your front door. You can trade in a car, which lowers your down payment and/or monthly interest rate depending on the value of the car. The flip side of convenience is you cannot test drive the vehicle.
Carvana offers bad credit consumers low-mileage cars at affordable prices. You finance the car directly from the Carvana website. The website provides several tools to ensure you remain within your budget, including a filter that displays images of vehicles matching your price range. Another tool allows you to change loan terms and the amount of the down payment to achieve the optimal monthly payment.
Blue Sky Auto Finance
Instead of making direct loans, Blue Sky Auto Finance operates as a loan facilitator by shopping your credit history to a wide variety of lenders. You do not have to contact numerous lenders before you receive approval for a loan. Blue Sky Finance does the work to connect you with more than one lender that specializes in approving bad credit loans. Complete one application, wait a few days, and then receive a list of lender prospects.
Most bad credit consumers must possess minimum credit scores of 500, with some exceptions allowed for different reasons. If your credit score is below 650, you need to demonstrate proof of income, which must exceed $1,800 per month before taxes. Blue Sky Auto Finance accepts consumers who do not have credit history or experienced a bankruptcy. You can expect to face a loan limit of $30,000.
Road Loans
Bad credit loan specialist Road Loans allows you to finance the purchase of a new or pre-owned vehicle. The company finances every type of credit, even consumers who sit near the lowest score of 300. You can work with Road Loans to refinance a current car loan, with perhaps the opportunity to enjoy a lower interest rate. After you submit an application, you should receive a credit decision within a few minutes.
For a private party purchase, you have to have the vehicle under consideration inspected and the car must not have more than 100,000 miles. Many bad credit auto lenders do not approve loans for private party automobile transactions. Online customer reviews praise Road Loans for providing free online tools such as a dealer network, a finance calculator, and tips for raising your credit score.
How to Get the Best Rate on a Loan
Most consumers believe that with bad credit, they are at the financial mercy of auto lenders. Nonetheless, you should follow several tips to get the best bad credit auto loan, with many of the tips applying to all consumers.
First Things First: Review Your Credit Report
You cannot expect to receive the best auto loan terms, if you go online or visit a dealer without knowing your credit score. Expect every dealership finance department you speak with to know your credit score, as well as why you have scored poorly. Unscrupulous finance managers use what you do not know against you by requiring you to pay back a loan quickly at an incredibly high interest rate. Your credit report might include one or more errors that federal law allows you to contest. As the most important document to determine your financial capability to pay off an auto loan, you must make sure everything within your credit report in 100% accurate.
Next Comes the Budget
It is important to view the purchase of a car on two cost fronts. First, you want to know what you can afford to pay monthly for an auto loan. Second, you should know what you want to pay for a car. Remember that most bad credit loan lenders can influence your vehicle options by restricting the price range. For the budget, itemize expense categories such as food, housing, insurance, and other expenses you pay monthly. Compare the total expenses to gross income and then determine where you can cut costs to fit a monthly auto loan into the monthly budget. Consumers who eagerly want to reverse a bad credit slide must enact fiscally responsible strategies that include creating and following a monthly budget.
Negotiate Like a Champ
Bad credit loans do not allow you to negotiate the interest rate, but you should negotiate the price of a vehicle. The price set by the manufacturer and the discounts offered by the dealership have nothing to do with your credit score. You implement many of the same negotiation tactics used by consumers who have good to excellent credit.
Shop for a vehicle at the end of the month, when most sales reps need to meet a dealer designated quota. Sales reps that need to sell a couple more cars to make quota are more likely to yield on the price of a car. Another good time to negotiate the price of a vehicle is during weekday mornings when dealerships see the least amount of foot traffic. The less prospective buyers on the lot, the better chance you have for getting the price you want. Above all, come to any dealership armed with vehicle price quotes from reputable online resources such as Edmunds and Kelley Blue Book.
Just Say No
Even if you negotiate like a pro, the sales rep at the other side of the table is the real sales professional. He or she wants you to drive away in a vehicle loaded with extra features that can set you back hundreds, if not thousands of dollars. Also referred to upgrades and add ons, extra features make the sales rep more money, while potentially putting you deeper into a financial hole. Some of the common extra features pushed by sales reps include an upgraded audio system and the addition of a custom designed exterior paint color.
Thoroughly Review the Auto Loan Agreement
Thoroughly review the car loan agreement offered by the lender or the dealership. Make sure all the information is what you verbally agreed to during negotiations. Pay special attention to the vehicle price and the interest rate charged on the loan principal. Read the fine print to prevent the inclusion of hidden fees, charges, and penalties. Make sure all the features you asked for are listed in the agreement. It sounds strange, but you have to confirm the make and model of the car to prevent a sales rep from charging you more to finance an auto loan.
Consumers with bad credit that take out car loans have a great opportunity to turn the financial slide around. The repayment of an entire installment loan boosts your credit score, as well as makes future car purchases less costly. Make sure to pay the monthly installment before the due date each month. Moreover, verify your timely auto loan payments reflect in your credit report.