It can be challenging to try to buy a car with bad credit, but you are not alone. Many people have struggled with bad credit situations at some point. There are ways around it and there is a light at the end of the tunnel. Anyone can do certain things to improve their credit a little, get a reasonable car loan, and buy a good quality one.
Method 1 of 5: Calculate How Much You Can Afford
Step 1. Determine the amount of money you can spend
You should plan in advance how much money you can comfortably pay for the car each month, which will help you get the best deal when negotiating. Understand that if you have bad credit, you may have to pay a higher amount each month, so you may need to make sure you can afford a new car.
- First of all, you need to calculate your total income per month. Subtract your current fixed expenses, such as rent, utilities, average, and insurance, and also try to get an estimate of your optional expenses, such as the amount of money you spend on entertainment.
- Once you've figured it out, determine how much of the remaining income you can allocate toward monthly car payments. Do not forget to include in these payments the cost of insurance, fuel and other types of vehicle maintenance.
Step 2. Identify what you need the car for
How you are going to use the car will help you determine the type of car you need. This way, it will be easier for you to find the right car at the right price. You must take into account your lifestyle and your needs.
- In case you have a family with children, you may need a sedan with four doors. A hatchback or station wagon might also do the trick. If you are single, you could go for a cheaper two-door coupe.
- In case you have to travel long distances, you should opt for a car with a higher fuel efficiency.
- If you need to haul large loads, such as construction materials, you may want to consider getting a truck.
Step 3. Research the type of car you can afford
You should start researching cars that are within your budget. Identify the make (that is, the company that makes the car), the model and the year of each of the cars that fit your budget and your lifestyle. You should try to get different options in order to find the best offer.
The makes and models you are looking for must be reliable. Read reviews online and compare cars to avoid paying for expensive repairs or maintenance later on
Step 4. Check the used car prices in the Kelley Blue Book
In case you want a used car, you can start checking prices in the Kelley Blue Book, in which you will find the value of certain makes, models and years of cars. This way, you can make an informed decision when buying the car and avoid having to pay too much.
Step 5. Create a budget
After identifying the type of car you need and can afford, you can start saving. You must assume a maximum of 36 months of payments plus a down payment and closing costs of 20%. You should start saving a little money each month before you even find the right car. This way, when the time comes, you can pay for the car purchase.
Method 2 of 5: Get a loan
Step 1. Save money for the down payment
Regardless of who ends up being your lender, it's always smart to pay the largest down payment you can afford. Even small down payments (like $ 500, for example) can make a big difference to your loan in the long run.
In case you don't need the car right away, it may be best to refrain from getting a loan altogether and simply buy an older car for cash
Step 2. Ask your friends and family for help
Maybe your friends and family can help you pay for a new car. They could loan you money to help you with the down payment or sign the loan together with you. Contact your family members to find out if any of them are willing and able to help you.
You should keep in mind that if a member of your family signs the loan together with you and you cannot pay it back, that person will be responsible for the loan, which could greatly harm your relationship
Step 3. Prepare to meet with the lenders
When meeting with a lender, you should have your documents handy, as all lenders will need to see multiple pay stubs, proof of identity (such as your driver's license), and proof of residency (such as a current electricity bill). to your name). They may need to see some additional documents, but the ones mentioned above are the general documents, and just with them, you may be able to get a good idea of how much you will be borrowing.
None of these things have an effect on your credit rating, the amount of money you can spend, or anything else on your part. However, they do have an effect on how the lender will view you. If you are prepared, you are more likely to get a fair offer than someone who looks hapless and disorganized would
Step 4. Attend a local credit union
These organizations are not for profit, so their loans charge lower interest rates than banks. Some credit unions make loans to non-members, but non-members often receive preferential treatment. Nowadays, it is easier than ever to join a credit union, so you should consider them as your first option to obtain a loan.
- Credit unions, in addition to generally having lower interest rates (2% on average on auto loans, compared to 4%), are more likely to take your particular circumstances into account and consider more than just your credit rating.
- Of course, there is a trade-off. Credit unions are not looking to make a profit, so they charge lower rates. Because they charge lower rates, they don't have as high profit margins. Therefore, they should be careful not to lend money to too many borrowers who are in the high risk category. Think of it this way: If your credit ranges from mediocre to bad, you may be able to get a loan from a credit union. However, if your credit is down, you will have difficulties.
Step 5. Talk to a local bank
You won't be able to get the interest rates that credit unions offer at most local banks. However, this does not mean that these banks do not have certain advantages. A local bank is more likely to be able to offer you options that a larger bank cannot. For instance:
- Less fees and lower interest rates than local banks. While the larger banks have technological and logistical advantages over small community banks and credit unions, they need money to pay for their ATM network, advanced applications, and branches on every corner.
- A local bank is less likely to be as rigid as a national bank. You may not have the flexibility of a credit union, but in reality, you will have a greater willingness and ability to lend money to an individual and not to a credit rating.
- Also, local banks are slightly more likely than a large bank to make a smaller loan for an older car. This can be ideal for someone who wants to minimize their car payments.
Step 6. Contact a national bank
In general, credit unions and local banks will have more flexibility when it comes to making loans, but you shouldn't ignore the larger banks. When it comes to lending money to people with bad credit, it is not for nothing that national banks are a key component. Certain national lenders have a large presence in the subprime auto loan market, providing a large number of loans that make many people affordable.
Find out which banks where you live are most involved in the subprime auto loan market and consider them if you are having difficulty obtaining loans from institutions that offer lower interest rates. While they may charge higher interest rates than a credit union, they won't be as high as some online lenders
Step 7. Search online
Online lenders are quite diverse. Some of them have a good reputation while others are the complete opposite. In any case, they are currently thriving, with most auto loans being made to high-risk buyers. While you might get some great deals, you could end up getting plucked too. In this area, you should inform yourself even more than usual.
- There is no single place you can go to get reputable and unbiased reviews from all online lenders, so before applying to one of them, you will need to do your research on their reviews and reputation. A good starting point is an entity like the US Better Business Bureau or its equivalent where you live. However, an entity of this type will not give you detailed information about the bank as a lender but as a company in general. If you find that an online lender has a rating other than A (or its equivalent), you should look elsewhere.
- Another good resource where you can investigate is a consumer financial protection entity (or its equivalent in the place where you live) that regulates financial entities in terms of their relationship with the public. This way, you can determine if a lender was the subject of an investigation or received a large number of complaints.
Method 3 of 5: Get a Car
Step 1. Consider bank or lender liens
Sometimes buying a car that has been repossessed by a bank could save you 25-40% of the cost of the car. However, keep in mind that since you won't be able to ask a mechanic to pre-check cars of this type, you may end up buying scrap metal. You can still do your research at local auctions or look for sellers online if you're willing to take the risk.
Keep in mind that repossessed cars are being sold as is, so they may have maintenance issues that you need to take care of
Step 2. Consider private sellers
If you're willing to handle the paperwork yourself, you can buy a used car from its previous owner. In general, if you choose this route, you can save a lot of money. Look in your local newspaper or online to see if there is someone who sells a car in your area. You could also check your social network if there is someone who is considering selling their car.
- Private sellers may be more willing to negotiate the price of the car, so don't hesitate to haggle.
- Don't forget that when you buy a car from a private seller, you will not have any legal recourse if something goes wrong with the car, and you will be responsible for filling out the paperwork.
- You should always obtain a background report on the chassis number of any car you are purchasing from a private seller. Also, it is highly recommended that you have a mechanic look over the car before purchasing.
Step 3. Buy the car from reputable sellers
Generally, the most reputable dealers in a given area are national franchises and chains. The franchises are the dealers who are the only ones who are authorized to sell new models of a certain brand within a geographic territory. These dealers always have an inventory of used cars that they obtained in part payment, so it is best to start there.
Once you've looked at national chain and franchise dealers, you can try smaller dealerships that employ bank or credit union financing and sell used cars with higher mileage. However, you should avoid dealerships that serve as their own lenders ("buy here, pay a lot here"), as while they might have attractive tag prices, they have a notorious reputation for selling junk, hiding damage, and many other things.
Step 4. Obtain a vehicle background report
Before buying a car, you should be careful to check its background. The most famous service for obtaining vehicle background reports is Carfax, but you can also find websites that provide the same service for free.
You should be careful to see if the car was ever wrecked, declared a total loss, suffered flood damage, is a salvage title, or if the odometer was ever tampered with. If that's the case, you should probably avoid that car
Method 4 of 5: Buy the car
Step 1. Negotiate the price with the seller
After getting pre-approved from the lender, you will know how much money you can spend. However, there is no need to provide this information to the seller, because if you introduce yourself saying you got a pre-approval of $ 15,000, that is likely what you end up spending. Instead, you should try to negotiate as much as you can beforehand.
You should not bring your pre-approval papers with you when you meet with the seller in case you think you will be tempted to show them to them
Step 2. Consider obtaining financing through the dealership, if it is available to you
If you're buying a car from a dealer, they may offer financing. Although this tends to have higher interest rates, the dealer may offer you other incentives (for example, refunds or interest-free periods) that lower the overall cost. Talk to the seller and ask for a quote for financing so you can see if it is right for you.
For some dealerships, they will advertise that they offer financing to people with bad credit or no credit at all. These dealerships typically charge extremely high interest rates, so it's best to first find out if you can get a loan from a bank, credit union, or reputable seller
Step 3. Have a mechanic inspect the car before closing the sale
Before buying a used car, you should ask the seller if they might ask a mechanic to examine the car to make sure it is not in trouble. This service should always be performed by your own mechanic. You should check the brakes, electrical system, compression, transmission, and other parts of the car to avoid buying a defective car.
Step 4. Finish the purchase
After purchasing the car, you must be careful that the title is transferred to your name. Make sure that the chassis number on the title is the same as the one on the car. Also, the mileage of the car must be the same or higher than that shown on the title. Review all the appropriate paperwork and then submit it to the local department of motor vehicles or its equivalent where you live.
You should be careful to get a new license plate that is registered where you live
Step 5. Purchase the necessary insurance
Your new car needs to have insurance, so you should contact various companies to get the best rate. In case your previous car had insurance, you can contact your insurance company and inform them that you bought a new car so they can modify your insurance. In this way, you will have the certainty that your insurance will cover your new car.
Method 5 of 5: Amend your credit score
Step 1. Check your credit report for errors
In the US alone, about 1 in 5 people have errors on their credit report, and you won't be able to know if you are part of this group (and, if so, how serious the damage to your credit rating could be) if you don't examine your own report.
- Research local laws, as you may be entitled to a free copy of your credit report per year from major credit bureaus.
- In case you notice that there is an error, you must report it to the credit bureau in writing and by certified mail. Include copies of documents that support your argument with the notice. Although it is not mandatory to inform the creditor in the same way and at the same time, it is worth doing so. In either case, the credit rating office will generally have around 30 days to investigate your claim, and if you are not satisfied with the resolution, you may be able to file a complaint with a local consumer financial protection office.
Step 2. Negotiate with creditors to remove negative items from your report
Once you've examined your credit report, you may notice some blemishes on your record that aren't necessarily mistakes but relics from when you were younger and poorer. If you contact the creditor, you may be able to negotiate to remove these items from the report, although this is by no means guaranteed.
You can tell the creditor that you would be willing to pay them off and pay off your debt if they remove those items from your credit report. The creditor may offer you a counter offer suggesting instead that the debt is "paid as agreed," which, while not as effective, makes a better impression than a delinquent account. Regardless of the agreement you reach, you must get it in writing
Step 3. Reduce your credit card debt until it is 30% below the credit line
One of the components of your credit score is the ratio of available credit to total credit. Your score will suffer if you use more than 30% of your available credit.
Therefore, if it is necessary for you to close an account, you will have to pay a sufficient amount of the remaining credit to offset the loss of that line of credit
Step 4. Avoid reaching the limit of your credit cards
You shouldn't overrun your credit cards for the same reason that you shouldn't abruptly cancel lines of credit: you use too high a proportion of your available credit. If you see that you will need a larger line of credit than the current one, you should ask your creditor to increase the limit or request a new card. In this way, you will be able to distribute the same amount of money through several credit sources, which will keep your overall credit utilization low.