For most of us, a car represents a level of freedom from public transportation’s limited schedule and limited service areas. A car is also, often, the first major purchase that we make as adults. Because cars are often a portable store of value, almost anybody can get a loan for a car because the lender will legally own the car until the loan is paid off. For those with a few bumps on their credit history, it can be harder to find that loan. More likely, a bad credit history can make it very hard to find a good car loan. Here are some tips.
First, a lender will give you a better deal if you have something at stake in that car also. Lenders get nervous about loaning money to somebody for a car when there is not going to be a significant down payment – especially when the borrower has a history of not making payments on time. Even though they might have the right to come take the car away if you stop paying, they do not want to find themselves holding a car that is worth less than the loan that you owe. Even if they sell the car at auction, they lose. In those situations, the lenders will charge a higher interest rate. To help give yourself the best chance of a good loan, scrape together a down payment so that there will be a buffer between the value of the car and the value of the loan. This has the added benefit of lowering your payment, which will also help make the loan easier to underwrite.
Second, if you do not need a car today, then consider waiting to make that purchase until you have fixed your credit. Credit scores and credit history consider the most recent information to be the most important, so a single late payment last month is more damaging than a single late payment last year. The more time that you let pass before you apply for your car loan, the more likely that your bad credit history will be viewed as a thing of the past.
Third, consider working with a bank that you already have a relationship with. For example, many banks will be more likely to give you a car loan if your paycheck is already directly deposited with them. They can be more confident that they will be able to get the payments, because they know that you will receive periodic payments at that bank. They might be willing to give you a loan in exchange for permission to deduct your car loan out of your checking account the day after you paycheck comes in every month.
Fourth, consider a co-signer. If a bank is reluctant to lend money for a car, they might change their mind if another person agrees to cover the payments if you default. A parent, spouse, or sibling can provide extra reassurance to the lender that they will assume the payments if necessary. There is the risk that future financial problems will cause a falling out between you and the co-signer, so think carefully before going down this path.
Finally, in rare circumstances you might pledge other collateral for the car loan. Normally the car itself is the only collateral when you get a car loan. If you stop paying, the lender can come and take the car away. But that process is difficult and expensive for the bank, and often costs more to accomplish than the car is worth. If you have other collateral, such as jewelry or another vehicle, or title to vacant land, you can pledge that property as collateral in the event that you default. Use this option with great caution: a failure to make payments could result in losing property that is meaningful to you beyond its financial value.
Very few people are unable to get any loan for a car. The difficulty when you have bad credit is in getting a good car loan. By working to minimize the risk that your bad credit poses to the lender, you are in a position to ask for a better deal than you would otherwise get.