Even with all the public transportation and ridesharing options today, most people in America still need a car whether it's getting to work or transporting their children from place to place. Buying a car requires a lot of money so you’ll likely need an auto loan. Lenders will typically use your FICO score to determine your creditworthiness. However, you’ve probably passed used car dealers that advertise ‘Good credit not needed’, and you may be wondering what that means. Read more to see how you can qualify for bad credit auto loans and special auto financing and what to watch out for.
It’s completely up to the individual lender to determine what their acceptable level of risk is, so there is no such thing as a de facto “good” or “bad” credit score. Typically, any credit score above 690 is considered good credit while below it is subprime, but credit approval will depend on the lender. Some lenders may even have a minimum credit score such as 650 or else you can’t borrow from them. You are more likely to be approved for credit or loan products, but the lower your score is, the worse the loan terms are for you such as higher interest rates.
Even though the average US FICO score hit a new high of 704 in 2018, many Americans fall into hard times which could negatively impact their credit scores. In addition, some people have no credit at all. The main cause of bad credit is the consistent inability to pay money back on time. Accidents happen. However, ‘bad credit’ is the main reason you may be turned away from buying a car and can’t get loan approval when you might need it the most. Know your credit situation and get a copy of your credit report before applying for a loan.
Borrowing someone else’s car or taking public transportation may not be an option. There are bad car loan lenders that offer special auto financing loans that don’t count on your credit score to determine your creditworthiness.
First thing you should do is consider your need for a car. Is this an emergency situation or can you hold off the car? Can you take public transportation instead? Can you borrow a family member’s car? Can you carpool with a coworker? Is rideshare a viable and cheaper option? By finding other options, you can put off buying a car while you work on building your credit score first. By building credit, you give yourself more options when it comes to finding an auto loan that works for you rather than accepting a high-interest rate bad credit auto loan.
Luckily, it doesn’t take a long time to build or rebuild your credit. You may improve your credit in the following ways:
Become an authorized user on a credit card: Have a credit cardholder add you to their account as an authorized user. Authorized users are not legally required to pay the bill, but you can still get the benefits of being an authorized user even if you don’t spend any money on the card.
Get a secured credit card: A secured credit card works just like a normal credit card, but you will typically be required to put a downpayment that is equal to the credit limit to secure the credit card.
Apply for a Possible Finance loan: Possible Finance provides customers with a short term loan, and we report on-time payments to two credit bureaus. Many of our customers take out small dollar loans specifically to build or rebuild their credit.
Get a credit-builder loan: Some credit unions and financial institutions offer a credit builder loan. They will lend you money and deposit it in a bank account you can’t touch. Over time, you repay the loan and once it’s fully paid, you can access the money in the bank account.
If you really do need the car, be prepared for high-interest loans, but definitely shop around first. The worst thing that you could do is to take the first financing offer you receive. Banks, local credit unions, and financing companies may still offer auto loans to people with bad credit. It’s always better to go with a bank, credit union, financial institution or an auto financing lender than the car dealership around the block that has a ‘buy here, pay here’ or ‘no credit check’ deal.
Borrowers should search for a loan within a 2-week timeframe. It’s an unfortunate truth that applying for a loan means a lender will check your credit score, and each inquiry negatively impacts your score. However, credit scoring models usually consider all of the credit check inquiries by different lenders within 14 days as one inquiry. By keeping your search within that time frame, you can mitigate the negative impact on your credit score.
If you are able to get a high-interest bad credit auto financing, continue to build your credit so you can eventually refinance your punitively high interest rate with other loan providers. You can get a better rate on your auto loan by refinancing when your credit score improves. Make sure you understand what your options are with each lender you evaluate as well as your financial situation.
Another option is to have a cosigner on your auto loan. The cosigner needs to have better credit than you to improve the interest rate and the terms of the loan. The cosigner essentially is “lending” you their better credit score to get the auto loan you’re looking to get.
Because BHPH dealerships take on much more risk, they generally charge much more money for cars than they are worth. However, this may be the only option those with poor credit have, and there’s nothing inherently bad about BHPH dealers. Still, be wary of the ‘buy here, pay here’ dealerships if that’s your only option.
Keep in mind that BHPH dealerships are in the financing business. Used cars are a way for them to sell higher interest rate financing options. Interest rates (APR) can be at 20% or even higher because they automatically assume you will not be able to pay back the loan. For comparison, in 2018, the average annual percentage rate of interest (APR) on a four-year, used-car loan was 5.31% from a bank or credit union.
Generally, a BHPH dealer requires a small down payment of whichever is less, 10% of the selling price or $1,000, though some could require well over 20%. However, you should put as much money down as you can afford to save on the overall size of the loan and interest. They will also typically require a minimum monthly income to ensure you will be able to afford the loan and repay the loan back.
As stated above, the best way to build your credit is on time monthly payments. Some BHPH dealers may not report your car payment history to the three credit bureaus. If you can, work with a dealer that reports your payments so that your credit score can continue to benefit from your on-time payments.
Watch out for the dealer’s payment structure. Many will require you to go in person to pay in cash every one or two weeks. This is much more inconvenient than an online payment portal or mail-in check. If the dealer is out of your way, this means additional costs for gas, car depreciation, and time away from your job or family.
GPS Tracking devices
BHPH dealers may also install a GPS tracking device to know customers’ whereabouts at all times so that they can repossess a car. Some of these devices can also be starter-interrupt devices that prevent a vehicle from starting. This is a way for them to mitigate their risk, but repossession is their last resort. They’d rather have you pay back your loan so if you have issues, they are incentivized to work with you.
‘Buy here, pay here’ dealers are likely your worst option even if you have a low credit score. Make sure you apply for pre-approvals from a few lenders before you decide on one. You’d be surprised at the different options you never considered, with both in-person and online lenders. If your only option is to go to a BHPH lot, go to a few different ones to consider their terms and price.
Finally, ensure you are only spending as much as you need to spend. If there are alternatives to buying a car when you have a poor credit score, explore those first. When given a chance to build credit history through credit cards, a personal loan, or a Possible loan, do so before or while you have a bad credit auto loan.