So, you need a new car, but your credit isn’t in great shape — what can you do? Believe it or not, there are ways to finance an auto loan even if you don’t have perfect credit. You first need to know where to look and what to look out for. Read on to learn how to buy a car even if you have bad credit (and how to avoid ending up in a lemon).
Where to Find Cars for Sale With Bad Credit
First of all, you might have more options than you realize in shopping for cars if you have bad credit. You can try franchise dealerships (which means they are affiliated with a specific car brand), independent dealerships (which carry a variety of different used cars), private sellers, and even subscription services. What’s more, you could lower the cost of the car by looking for used or certified pre-owned cars. This can sometimes seem like a risk, but taking a test drive to a trusted mechanic and pulling up a vehicle history report can help mitigate that risk.
There are many pros and cons of buying a car, but the key whether working with a dealership or a private seller is to keep an eye out for hidden fees, not being talked into a car that won’t be reliable, and securing the best financing you can (which isn’t always going to be at the dealership).
Buying Through a Franchise Car Dealership
Car dealerships have historically been the first place people think of when it comes to buying a car, especially a new one. If you have bad credit, though, a new car may simply be out of reach unless you have significant monthly income. That’s where used cars come in.
Franchise car dealerships almost always have a used car lot associated with the business. While there are often many makes and models to choose from, many franchise dealerships stock only late-model vehicles that are free of damage and typically have relatively low miles. Some may still be under warranty, in fact, or are eligible for an extended warranty. These cars typically come with a higher price tag, though, meaning you may have a hard time qualifying for financing you can afford unless you have a sizable down payment, solid income, or a valuable trade-in.
Buying Through an Independent Car Dealership
If your credit is bad, you may be considering buying a car through an independent car dealership that works specifically with people who have bad credit. They can be as simple to find as typing “bad credit car dealerships” and your city or town’s name into Google. Used car lots often advertise the fact that they’ll accept customers with imperfect credit or even bankruptcy.
The question is, should you work with them?
While these lots frequently offer cars and trucks at lower prices than you’ll find at franchise car dealerships, they may also have more miles, are older, and may have been repaired after an accident. That’s why it’s important to check the vehicle’s history report (though it’s a good idea to do this no matter where you buy a used car).
Buying Through Private Sellers
If you prefer not to go through a dealer, you can look for a car via private sellers. This is easier than ever thanks to the plethora of online car-shopping sites, and if you stick to local sellers, you can probably still get in a test drive and inspection with your mechanic. Although you very likely won’t be able to secure financing through a private seller, some people might find it easier to negotiate prices with another individual rather than a sales representative at a car dealership.
Opt for a Car Subscription
Here’s something that’s fairly new: There are now car subscription services that enable you to pay a monthly fee for a car without having to commit to a lease or purchase. Some of these services even include insurance, which could potentially help lower your overall monthly car costs.
One such service is called Fair. According to its website, Fair enables you to search for cars based on how much you can pay each month, and you can return the car anytime. That’s helpful if you start to realize that you’re going to run into trouble making payments because your credit won’t take a hit if you return the car before you end up defaulting.
Where to Get an Auto Loan If You Have Bad Credit
Finding cars you can buy with bad credit is one thing; financing them is another. This is where things can get a little tricky, though getting a co-signer can make it easier to secure a loan with favorable rates. But even if you can’t get a co-signer, there are multiple options available for getting car loans with bad credit.
Although large banks are an obvious place to go for a loan, they sometimes come with tougher lending standards. A credit union, however, might be more flexible. Credit unions are known for their emphasis on their communities, and building a relationship with one could mean getting credit a national bank might not approve you for.
There’s no guarantee of this, of course, but it doesn’t hurt to shop around for credit unions in your area to see if they might be able to get you into an auto loan.
Online banks don’t have the emphasis on community that credit unions have, but they do have lower overhead than most banks. That cost savings sometimes leads to better interest rates, both for deposit accounts and credit products. This is another option that might be worth looking into when you start shopping for an auto loan.
That said, not all online banks and lenders are reputable. An article in U.S. News gives consumers a warning that “advertisements that proudly proclaim that they can loan money to anyone” are a potential red flag. U.S. News goes on to say that, “If a lender sees you as a risky borrower and offers to loan you a lot of money for a long term, that risk will be priced into an expensive loan.”
Independent Car Dealerships
If other options don’t work out, you can still try for a loan through an independent car dealer — a.k.a. a used car lot. However, there are a few red flags to watch out for if you do.
The Center for Responsible Lending lists a few in an article entitled, “Signs of Predatory Auto Finance Loans,” including buy-here, pay-here dealerships and yo-yo financing. Here’s what they had to say about buy-here, pay-here dealerships:
“Buy Here Pay Here (BHPH) dealerships typically finance used auto loans in-house to borrowers with no or poor credit histories. The average APR is much higher than a bank or credit union loan. BHPH dealers expect much higher default and repossession rates. Instead of responsibly financing affordable cars, the business model depends on churning the same vehicles (many would be classified as ‘lemons’) to local buyers as many times as possible.”
What’s more, U.S. News reports that rates on these deals can get as high as 18-30 percent. And credit reporting agency Experian says they don’t always report the borrower’s payments to agencies such as their own. Therefore, not only might you be paying more than the average auto loan interest rates, your payments might not help improve your credit (which they would in a traditional loan if paid in full and on time).
Yo-yo financing is another one to watch out for, and The Center for Responsible Lending explains how it works:
“The buyer is either convinced to enter into or unwittingly placed in a conditional sale agreement rather than a final sale. After the buyer drives the vehicle home, the dealer later claims to be unable to fund the loan at the agreed-upon terms. The buyer is required to return the car and renegotiate an often more costly loan. Often, the buyer is told that their down payment is non-refundable and/or their trade-in has already been sold.”
You can read about more red flags via The Center for Responsible Lending. Ultimately, if you’re going to finance through the car dealership or used car dealer, it’s important to carefully review the terms of the deal and understand everything you’re paying for.
Choosing a Car That’ll Last
When deciding on a car, there’s no doubt you’ll want the best deal you can get — but that doesn’t always mean the cheapest deal you can get. In fact, if you can afford to buy a new or used car with a good resale value, you might have the option to sell it down the road if you want an upgrade or need the cash. What’s more, the resale value could indicate a higher-quality car that might last longer, though that’s no guarantee.
A car’s value drops as soon as it’s in your possession, but it still helps to ensure that you invest in a car that will work for you for more than a short period of time. Even if you have bad credit, it’s never a bad idea to focus on a reliable car when you’re looking for deals.