7 tips for preparing for a car loan with bad credit
When you have credit problems, it helps to prepare for the car buying process. We’ve got a list of seven things to consider, prepare for, and do, all before you go to a lender or dealership for your next car loan with bad credit.
1. Check your credit
If you have credit problems, you need to know where you are. Right now, you can request your credit reports for free, every week, until April 2021. It’s a great opportunity to repair your credit and learn where your credit is each week, so you can spot your credit weaknesses and strengthen them before you apply.
You can also check your reports for errors, duplicates, or just old accounts and work to clean up your reports to improve your credit score. Auto lenders review your reports, so you need to know what’s in them before you take them out. You can also check your own reports hassle-free, as checking them won’t hurt your score.
There are a number of ways you can check your credit score. Check if your bank or credit card provider offers free access to it. Otherwise, you can pay a nominal fee to get it from FICO, credit bureaus, or a online service as our trusted partner. Whatever you do, try to get your FICO credit score, as this is the one that is used the most by lenders.
2. Save for a down payment
Typically, you will need a down payment to get your next car loan if you have bad credit. If you are working with a subprime auto lender (aka a bad credit auto lender), expect to need at least $ 1,000 or 10% of the vehicle’s selling price as a deposit.
You can always pay more than the minimum amount required to lower your monthly payment or possibly help you get into a nicer car. If you have a vehicle that you would like to finance but the monthly payment is over your budget, a down payment can help you bridge that gap.
3. Prepare your exchange
If you don’t have the full down payment amount you need in cash, you can also use a stock swap. For a trade-in to help you meet a payment requirement, you must either own the car or the vehicle must have equity.
If you owe less than the value of the car, this difference is called equity and can be used for the sale price of your next vehicle. If you owe more than the car’s value, it’s called negative equity, and it won’t help you meet the down payment requirement of bad credit auto lenders.
To get an estimate of the value of your trade-in, you can research the prices on sites such as Kelley Blue Book and NADAguides. And if you you still owe on your swap, contact your lender and ask for a repayment amount, then subtract that amount from the estimate you got online to see if you have equity.
This way you can walk into a dealership with a rough estimate of what might be on offer to you. Just keep in mind that the actual cash value of your trade-in is what a dealer is willing to offer. There is usually room for negotiation, but you won’t have any negotiating power if you don’t know in advance what your trade is worth!
4. Shop Car Insurance Rates Now
If you are financing a vehicle, you need fully covered auto insurance. Fortunately, there are tons of insurance companies out there and getting a quote is relatively easy (thanks to the Internet).
If you have a rough idea of the car you want to finance, you can contact an insurance company with the vehicle information, and they can usually give you a quote over the phone or even online. This can help you prepare your budget, and you can take your time to buy insurance while you are shopping for an auto loan.
You’ll also need proof of auto insurance before you can drive your next vehicle out of the dealer’s parking lot, so it’s never too early to start comparing prices.
5. Consider a co-signer or co-borrower
As a borrower with less than perfect credit, it may be worthwhile to hire a co-signer or co-borrower to increase your chances of being approved. They look alike, but they have different meanings and can help you in different ways.
A the co-signer is someone who lends you their good credit and is legally obligated to make car payments if you can’t or don’t. They are in no way responsible for paying off the car loan with you each month, since you will need to qualify with your income alone to be considered for financing. A co-signer is a payer of last resort on the loan.
Many borrowers ask a relative or close family member to co-sign a loan with them. If you’re a new borrower or have bad credit, but have the income to pay for a car loan on your own, this might be the solution for you.
A co-borrower, on the other hand, is a life partner or spouse who also becomes responsible for the car loan by your side. You and the co-borrower would combine your income and expenses and both earn the same rights to the vehicle if you qualify for auto financing.
If your main problem with getting approved for a car loan is that you don’t have enough income, a co-borrower might be what you need to increase your chances of getting approved.
6. Pay off your debts
When you apply for a car loan and your credit is low, your lender will likely calculate your debt-to-income ratio (DTI) to see if you can afford a car loan.
This is a simple ratio that compares the income you earn each month to your expenses. If you have high credit card debt or other income-increasing loans, it could mean that your DTI ratio is too high for you to qualify for a car loan. Typically, bad credit lenders do not approve borrowers with a DTI ratio greater than 45% to 50%.
You can take a look at your spending each month and work to pay off your debt to free up your monthly income if your DTI ratio is too high. As an added bonus, if you pay off your credit cards below 30% of their limit, it helps improve your credit score!
7. Work with the right lender
When your credit isn’t there, it can be difficult to get approval for a car loan from a traditional lender. Credit union lenders, banks, and captive auto lenders tend to prefer borrowers with good credit, so working with a subprime lender who works specifically with bad credit borrowers may be a better way to go. get funding.
Subprime lenders have the resources to work with many different credit situations including post-bankruptcy, tarnished credit, and situational bad credit due to illness or other life events.
They can work with these borrowers because they consider more than just a credit score, but subprime lenders are not available everywhere. They work remotely through some dealers. Therefore, the search for the right lender begins with finding a special financial dealer.
Take the next step in auto financing
Preparing for a car loan isn’t always as fun as taking a test drive, but it can be essential for successful driving. If you’re ready to take the plunge and find the right lender for the job, start with us at Auto Express Credit.
We match borrowers with bad credit to special finance brokers in their area with loan options for their unique credit situation. Start by filling out our quick and free auto loan application form.