This just in… not everyone has perfect credit. As non-revelatory as this is, the auto industry still favors those who… well… do. Whatever your circumstances — whether you’re just starting to establish credit of your own or you tripped somewhere along the way and are looking to get back on the good side of the credit equation — don’t despair about your vehicle buying prospects just yet!
The average VantageScore was 675 in 2017, with 21.2% of the population having scores below 600. (Source:Experian)
Even with less-than-stellar credit, finding a lender willing to work with you in order to make a sale probably isn’t all that far-fetched. It just might require you to make a few concessions and adjustments to your vehicle shopping approach. Here are some tips and tools to help you land on your feet while securing reliable transportation.
Establish Realistic Budget Expectations
First things first: you’ll need to establish exactly how much you’re able to spend. It’s important to have a strong understanding of the relationship between your credit score and auto buying capabilities (see How Does my Credit Score Affect my Car Loan for more information). From there, you can start crunching some realistic numbers.
Because your interest rate is likely going to be higher, thus creating larger payments, your aim should be to shrink the amount of car you need as much as possible. Although the “just hit the lot” head-turner of a vehicle with all the bells and whistles is likely the thing that most speaks to your heart, that new car smell will eventually fade, and then you’ll be left with a hefty payment. Going the more practical route — fewer gadgets, smaller, or even slightly older — is often a far more budget-friendly option.
Also be mindful of the overall loan terms, and not just the monthly payments. Even if a loan payment looks good on paper, they could lead to you paying more for your car over the life of the loan. According to Bankrate’s How to Get a Car Loan with Bad Credit, “Look for the most favorable terms — usually the lowest APR over the shortest period of time. That way, you’ll have more manageable monthly payments with reasonable interest rates.”
Ways To Improve Your Credit
Short-term Credit Strategies
Your approach to credit building can be broken down into two methods: the short-term changes and long-term changes. If time isn’t on your side and you need a new ride sooner rather than later, think about short-term changes you can implement in the immediate future that’ll have a quicker impact on your credit score.
Find Credit Report Errors
If you haven’t already, you should request your credit report from all three vendors: Equifax, Experian, and TransUnion. And don’t just take the information at face value; go through it carefully, looking for any misinformation or inaccuracies that are erroneously dragging your credit down. If you find anything like this, you can dispute the claims and hopefully lift your credit. (See How to Dispute Credit Report Errors in 3 Steps by Nerdwallet for more information on this.)
Pay Off Fees/Lower Balances
If you don’t have a lot of disposable cash, focus on what you can pay off quickly, especially revolving debt like credit cards. Payment activity typically gets reported to the bureaus monthly, which will then be reflected in your score. According to credit score expert John Ulzheimer, “If you have a bunch of maxed-out credit cards, you could elevate your scores by nearly 100 points by paying them all off.”
Avoid Taking On More Credit
If you know you’re about to apply for a loan, the last thing you want to do is extend your credit further and take out any other form of credit. This will come off as a red flag to potential lending partners and could prevent you from securing an auto loan.
When you are going to start applying, you should make sure you’re ready. The credit inquiry involved will create a “hard hit” on your credit. This is often factored in as part of the auto-buying process and overlooked for the most part. But if you dawdle too much, this will be less evident to lenders, and that hit will only serve to lower your credit with no reward. Even worse, they may have to run another inquiry, creating yet another hit on your credit.
Long-term Credit Strategies
When you’re thinking about the long term, you can focus on bigger picture improvements that will move the needle in the right direction and keep it there. One overarching approach is to focus on staying well under your credit limit, as your credit utilization — aka how much of your credit limit you use — has a big impact on your score. Bruce McClary, a spokesman for the National Foundation for Credit Counseling, speaks to how, “it’s best to keep balances to 30% of your credit limits or less, both overall and per-card utilization counts,” as outlined in How to Improve Your Credit by 100 Points in 3 Steps by Nerdwallet.
This same article further goes into some good tricks of the trade to help you get into your credit sweet spot:
Make Multiple Small Payments A Month
Often called micropayments, this approach helps to keep balances down. You can even treat your credit card as a debit card, paying online as soon as you see a purchase is posted.
Ask For A Credit Limit Increase
When your limit goes up and your balance stays the same, you instantly lower utilization. Call your card issuer and ask whether you can get a higher limit without a “hard” credit inquiry. Hard inquiries can temporarily drop your score a few points.
Move Some Debt
A debt consolidation loan could let you reduce or eliminate card balances, lowering your utilization. Getting a personal loan at a better rate than your credit cards have also could save you money in interest.
How To Make Auto Lenders Compete For You
If you are willing to do a little research, some states offer auto buying programs for low-income buyers (check around to see if there are any in your area). Beyond that, there are a few steps you can take to better your position with potential lenders.
It’s not a bad idea to get pre-approved for a car loan from a bank or credit union before even shopping at a dealership. A pre-approved offer guarantees that you have a loan to cover the cost of the car you want and may put you in a better negotiating position when you’re at the financing table.
Make A Bigger Down Payment
Your ability to get a loan hinges on a risk assessment from the lender. The fact that you’re able to bring a sizable down payment to the table will present you as a serious buyer and improve your chances of securing a loan.
Get A Cosigner
Sometimes it’s just too difficult to go on your credit alone, or it will make the interest rate skyrocket more than you can afford. In that case, you may want to look into someone who is willing to cosign on the loan. Just be mindful that any missteps you make will also reflect poorly on their credit. So make sure you’re doing right by them!
Bring Your Paperwork
Just like when utility companies ask for proof of good payment history, supporting paperwork that positions you in a good light can go a long way. If you’re able to establish a record of on-time payments with other vendors, this will help you come off as a credible prospective buyer. It helps to prove you're both reliable and organized.
What To Avoid When Buying A Car
It’s nice when people work with you, but if they are willing to go WAY out of their way, you might want to step back and question their intentions. Like the old adage goes, “if it looks too good to be true, it probably is.” This same idea applies to insane “deals” and some exploitative auto sellers.
Avoid “Buy here, Pay here” Vendors
"Buy here, pay here” car lots can be appealing for their on-site financing that often incorporates less stringent credit qualifications. However, they’ve also developed a reputation for “being overpriced, selling poor-quality vehicles, and taking advantage of consumers with bad credit,” as detailed in 12 Tips for Buying a Car With Bad Credit by The Balance. The article goes on to advise that you: ask for the dealership’s recommendations, check the vehicle value and history and if you’re able to take a mechanic friend shopping with you, even better.
Dot Your I’s & Cross Your T’s
There’s no disputing that loan paperwork can be confusing, but it’s important to not get lackadaisical when you’re sitting at the financing table. Make sure everything you sign matches up to any verbal terms the seller has discussed. Also, avoid taking the car home for a “trial run” before finalizing these agreements in writing. Unscrupulous sellers could try to change the terms from what was originally agreed upon, forcing you into an uncomfortable situation.
When it comes to buying a car with imperfect credit, it may entail jumping through a few extra hoops, but with a little work, you can usually come to an outcome that works for you. There’s also another silver lining to all this hard work and due diligence: once you secure an auto loan, that can help build your credit even further. By making timely payments — or even paying ahead — you can build a strong credit history and decrease your debt-to-credit ratio. There’s even a new type of loan that offers take-backs™, which helps you to feel more secure about paying ahead on your loan.
There are a lot of little things you can do that will help land you a new ride AND improve your credit in the process. Choose what works best for you, put in a little sweat equity, and you can start laying the groundwork for where you want to be.