Five Tips for Buying a Car with Bad Credit
Do you want to buy a car but worry that your bad credit will make it impossible for you to get financing? Bad credit can certainly create challenges for the car buyer, but it does not necessarily mean you’re out of luck. You may just need to take a few steps to prove to a lender that you are a trustworthy borrower.
The problem with a bad credit score is that it’s a red flag for lenders. It can indicate that the potential borrower has no borrowing history, doesn’t pay their bills on time, and/or has borrowed more money than they can afford to pay off. Lending to people with that kind of history can put the lender at risk of losing money.
Lenders don’t want to lend to someone who won’t pay them back, so they may choose not to lend to those riskier borrowers. However, there are plenty of lenders, particularly lenders at smaller local credit unions or banks, who will take a chance on someone who has simply hit a rough patch.
How can you prove you’re worth the risk?
Lenders want to see that you are taking steps toward financial stability and are committed to taking responsibility for your purchases. Most lenders understand that good people hit hard times that force them into poor financial situations. As long as you can show that you’re coming out of those hard times and making a serious effort to undo past financial mistakes, some lenders will work with you on financing.
Here are fives ways you can prove you’re taking your finances seriously:
- Start to clean up outstanding debt: Your current debt reduces the amount of money you have each month to pay a car loan. Depending on the amount and type of debt you have, and whether you are making regular payments, it could also be hurting your credit. You can show your lender that you are getting your finances in order by creating a plan to knock down your debt.
You don’t have to get rid of all your debt before talking to a lender, but your lender will want to see that you are taking steps to improve your credit and your overall financial health. If you have outstanding bills, reach out to your creditors and get on a payment plan.
You can start small, paying off what you can afford. The important part is creating the plan and following through.
- Gather three references from non-traditional creditors: Do you have a history of paying your phone company, utility provider, landlord, etc. on time every month? Though timely payments to these types of non-traditional lenders won’t hit your credit report, they are a good way of proving a history of financial responsibility to your lender. Collect letters of reference from three of these creditors and present them to your lender to show that you are meeting these financial responsibilities.
- Look for a reasonable car: Your lender will want to see that you’re making responsible purchasing decisions, so look for an affordable car. You may want the nicest car with all the bells and whistles, but for now, choose the car that meets your needs (as opposed to your wants). Once your credit improves, you can get the car of your dreams.
- Get a cosigner: Having someone cosign your loan gives you accountability and allows you to build your credit score. It also allows you to benefit from the credit score of your cosigner.
The only drawback to using a cosigner is that if you miss payments, you can quickly destroy the credit of your cosigner, which can create bad blood between you and that person. If you choose this route, make sure to keep up on those payments!
- Save money down: By saving money prior to purchasing the car, you are showing that you’re willing to put some skin in the game. A down payment will also reduce the amount of interest you pay over the course of the loan.
ARE YOU IN THE MARKET FOR A NEW CAR?
Start by getting pre-approved for an auto loan with VSECU.
Get help when you need it.
As you begin to repair and build your credit, don’t be afraid to reach out for help. Speak with a consultant at your local financial institution or work with a financial counselor. We often recommend GreenPath Financial Wellness, which offers free financial guidance and other resources (some free and some offered at a low cost) for our members.
Reprice your loan for better interest rates.
Finally, if you have bad credit, your lender will likely charge you a higher interest rate. The higher interest rate protects them, to some extent, against the risk of lending to a borrower with low credit. However, the better your credit gets, the more open your lender may be to offering you a better interest rate.
After some months have passed and you’ve made the effort to clean up your debt and any other issues, your score will rise. At this point, check in with your lender and see if they will be willing to reprice or refinance your loan for a lower rate.
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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.
About Joshua Dobrovich
Joshua is the consumer lending team lead at VSECU. He supports the consumer lending team in all areas of the lending process and helps members obtain credit and financing to achieve their personal goals. Joshua has an extensive background in automotive. He has been the service manager and, most recently, business manager at The Automaster Honda in Shelburne VT. Joshua and his partner Jennie have two awesome daughters Kyla and Rylin and live in central Vermont.