How to Apply for a Car Loan with Bad Credit

You have your eye on that shiny new car, but it’s not easy to get approved for a car loan when you have bad credit. Fortunately, there are ways around this obstacle and you can actually be driving that new car in no time at all! Keep reading to learn how to apply for a car loan with bad credit.

Why do you need a loan?

The reasons people take out a loan can vary greatly. You might need a loan to buy a car, pay off credit card debt, or even finance your next home. Loans are made by financial institutions such as banks and credit unions, and they’re also provided by online lenders and peer-to-peer services like Prosper or Lending Club. Before you apply for a loan, be sure you know why you need one—and how you’ll use it.

Where can you apply for the loan?

There are many lending institutions you can apply for car loan. But the basic idea is that, if you have bad credit, you will have to apply for subprime loans. These subprime lenders are available in almost every state of the country. However, if your credit score is low, then it would be wise not to take up their offers and instead go for secured loans or conventional loan providers like banks and finance companies. Some of the best places where you can apply for car loan with bad credit are listed below

How do banks underwrite loans?

When banks underwrite car loans, they look at factors such as credit scores, length of employment and income. Bankers want to know that borrowers will be able to make their monthly payments. If you’re considering applying for a car loan and have a low credit score or no established credit history, you may be in luck—there are lenders who specialize in serving people with little or bad credit. In order to qualify for these types of loans, however, applicants must meet certain conditions.

What’s your credit score, and how does it affect the interest rate on your loan?

One of your biggest obstacles as you’re applying for car loans, regardless of your credit score, is establishing a track record. The longer you have had and used credit responsibly, and paid off debt on time (or paid down any outstanding loans), when you apply for another loan it will be easier to get approved and at better rates too.

How do I know if I qualify for an auto loan?

The short answer is probably. Nearly anyone can qualify for an auto loan if they apply with a lender that doesn’t adhere to strict credit criteria. If you have any decent credit history—even if it’s not stellar, or even close to it—you should be able to find a lender who will approve you for an auto loan. Many lenders focus on your income and how long you’ve been at your job rather than your credit score.

What should I consider when looking at financing options?

Many car buyers who have poor credit choose not to finance their purchase. But what if you don’t have thousands of dollars in savings, or if you need your car to get back and forth from work? Fortunately, there are still options—you just need to be careful. Consider these tips before looking into financing options.

Calculate how much you can afford in monthly payments.

If you know how much car you can afford, it’s time to calculate how much you can comfortably afford in monthly payments. Work out your monthly budget and factor in car-related expenses like gas, maintenance, and insurance. Then use an online loan calculator (we like Bank rate’s) to figure out what kind of monthly payment you can manage.

Will your personal finances affect my credit score?

If you're attempting to apply for a car loan with bad credit, lenders will most likely look at your personal finances in addition to your credit score. This isn't necessarily a negative mark against you. You can improve your financial standing by eliminating debt and saving up an emergency fund. The more positive steps you take on both fronts, the better your chances of getting approved for that car loan.

Add miscellaneous fees, like insurance premiums.

Before applying for a car loan, make sure you have an idea of what your monthly payments will look like once you’ve signed on. This way, if you’re trying to budget your income and expenses (and, let’s be honest: who isn’t?), then it won’t come as a surprise when premiums appear on top of your bill each month.

Conclusion

A car loan is an excellent way to get behind the wheel of your dream vehicle. With careful planning and consideration, you can get approved for financing without sacrificing your credit score.