Whether you have limited credit history, especially as a new borrower, or some negative credit history, there are many reasons why you may not have a great credit score. Many people get a car loan to purchase a new vehicle – but it can be tricky to qualify for one if you don’t have the best credit.
Don’t worry, even if you have a poor credit score there still may be some options available to help you get a car loan! We’ve put together this guide to help walk you through these options and help get you on the path to enjoying your new car.
Your Credit Score
Before we dive into options to help you qualify for a car loan, let’s first look at credit and credit scores to better understand how they work.
Your credit score is a ranking provided by a credit bureau that is based on your previous credit activity, usually in a range set between 300 and 850. This score takes into account your credit balances and usage, credit history, payment history, and what type of credit you’ve received.
Lenders use your credit score to determine the level of risk and reliability when deciding whether or not to provide you with credit. This score also can impact what interest rates and terms you can qualify for with your auto loan.
Having a lower credit score doesn’t always mean that you won’t qualify for a car loan, but it may limit you in several ways. Those with a higher credit score may have more options for lower interest rates and a variety of terms than those with a poor credit score. There are still some options available to help you qualify with a lower credit score.
Improving Your Credit
While it may take a bit of time, improving your credit can be a huge step towards getting a car loan. If you decide to go this route, you’ll first want to take a look at your credit history by reviewing your credit report. Your credit report will show you detailed information that can then be used to make changes and improvements to your score.
Once you have an idea of where your credit history is at, it’s time to get started and work on improving your credit! Here are five ways that you can improve your credit:
1. Make Regular, On Time Payments
This is going to have a huge impact on your credit score! Make sure that any payments that are being reported to the credit bureaus are being made on time and that each payment is made in full. Remind yourself to make the payment, write it on the calendar, a notification on your phone, or even utilizing online or scheduled bill pay options.
2. Utilize a Secured Credit Card
A secured credit card can be a great option for building and improving your credit, especially if you are having difficulties qualifying for unsecured credit cards. This credit card uses your own funds as security for the credit you are utilizing, while still allowing you to make payments for your credit history.
3. Dispute Any Credit Report Errors
Sometimes, there are errors on your credit report. This errors include inaccurate information being reported, lines of credit that are open or have been closed, or fraudulent credit issued in your name. You can dispute any errors that you find with the credit bureau. This is a process, so expect it to take some time, but it will be worth it once your report is updated.
4. Pay Down Credit Cards
Paying down any credit card balances that you currently carry can help adjust your credit usage. Not only will it free up your credit, but credit bureaus will typically reward you by improving your score for not using the maximum credit available to you. As an added bonus, decreasing your credit card balance could potentially help you qualify for a higher car loan amount.
5. Address Any Collections or Overdue Charges
If you have any collections accounts or payments that are overdue, taking care of them will also help improve your credit. Again, this may be a process, but many companies are willing to work with you to figure out payment plans or financial aid opportunities. Bringing all your accounts current will improve your history moving forward, which will improve your score.
Higher Down Payment
There are many different factors that are considered when qualifying for an auto loan, including the down payment amount that you plan to make. Lenders have limitations on the loan based on the value of a vehicle, the age and condition of the vehicle, along with the loan terms.
If you have poor credit, utilizing a higher down payment can be an option to help you qualify for a car loan. This payment will lower the total loan amount that you’ll need to purchase the car, which may better fit what you are able to qualify for.
A lower loan amount means that you may have a higher interest rate due to credit. You’ll pay less interest than if the loan amount was higher. This is a great opportunity to save money on your loan as well.
Get a Cosigner
Another option to get a car loan even if you have poor credit is to use a cosigner. A cosigner who has a higher credit score helps reduce the risks of the lender providing you with a loan, helping you to qualify for the loan.
When you use a cosigner, both of your information is being taken into consideration for the loan qualification. This also means that both of you will be responsible for the loan. If your cosigner has a higher credit score, you may find that you can qualify for better rates and terms overall. As an added benefit, making the regular payments from this loan can also help improve your credit score.
It’s important that your cosigner is someone you can trust and ensure that they can trust you. When you cosign on the loan, you both become responsible to ensure that the loan is paid for. Any missed or late payments will report to both of your credit histories and hurt your score, so it’s important that both parties be responsible for the payments.
Lower credit scores may result in higher interest rates and overall loan cost. Don’t get discouraged if you have a poor credit score. The lower your credit score, the more of an impact you’ll see – even with just small changes. Over time, as you work to clean up your credit, your credit history and score will improve.