Unless you’re planning to buy a used car with cash, you will have to get some kind of financing to drive off the lot with your new-to-you vehicle. In this day and age, buying a car with cash just really isn’t feasible. After all, the average sticker price of a used car in 2017 was a whopping $19,400, and those prices are only expected to increase in the coming years. When 62 percent of Americans have less than $1,000 in their savings accounts, you can easily see why securing an auto loan to finance a used car becomes necessary. But what happens if you have bad credit? Trying to finance a car when you have bad credit can be a scary and frustrating process. There are many questions that may be running through your head: What kinds of loans can I get? How high does my score need to be? How will the credit inquiry affect my credit score? We will hopefully answer all of these questions and more here, so you can have peace of mind when shopping for used cars or elsewhere.
Types of Loans
There are many different types of loans, and the one you will need depends on your own specific situation. The first type of loan is the traditional loan, which is financed through a bank or credit union. This is the simplest type of loan, and it the one that most buyers will generally want or need. However, there are also commercial hire purchases, finance leases, novated leases, operating leases, and chattel mortgages. Because the traditional loan is the most universally applicable, we will mainly be discussing this process. However, keep the other options in mind in case one of those would be better for your specific situation.
When you are shopping for a used car in Columbus, Ohio or anywhere else in the United States, you will be classified as a certain type of buyer depending on your credit score. The type of buyer you are determines the interest rate you will pay for your auto loan. Credit is measured on a scale from 300 to 850. 300 to 500 is considered deep subprime, 501 to 600 is subprime, 601 to 660 is non-prime, 661 to 780 is prime, and 781 to 850 is considered super prime.
The average credit score needed when buying a used car is 655, but you can still get approved for a loan if your credit score is lower than that. After all, nearly a quarter of auto loans are given to people with subprime and deep subprime credit. Of course, your interest rates will be higher, but it is possible to get approved.
The interest rates for auto loans for people with subprime or deep subprime credit are generally pretty high. For used cars, customers with subprime credit usually get an interest rate around 15.72 percent, while people with deep subprime credit will get a rate around 18.98 percent.
The interest rates decrease dramatically for non-prime, prime, and super prime shoppers. Non-prime customers will usually get an interest rate around 9.47 percent, prime shoppers get 5.12 percent, and super prime buyers will get as low as 3.4 percent interest. Of course, the lower the interest rate you can get, the less money you will pay for the car overall.
As many people know, applying for new credit appears on your credit history and will affect your overall credit score. This can be concerning for people with low credit score who aren’t even sure if they will get approved on the first try. Plus, any dip in your credit score can affect what interest rate you will get.
There is good news here. When shopping for loans for cars, houses, or education, the inquiries for a loan will only be counted as one inquiry if they fall within a 30 day period. This means that, while you’re shopping around for different loans and interest rates, your inquiries will only be counted as one if you secure a loan within 30 days. Additionally, it is important to remember that credit inquiries make up a small portion of your credit score; credit inquiries will generally only cost you five or so points on your credit score.
Improving Your Credit Score
Perhaps you want to work on improving your credit score before you go shopping for a used car. There are many different things you can do to improve your credit to get you a better interest rate on your auto loan and increase your chances of getting approved for one.
The very first thing to do is check your credit report and then clean it up. Cleaning up a credit report involves paying off past due accounts, disputing credit reporting errors, and adding positive information to your report.
The second thing to do is avoid additional bad credit activities. Pay everything on time. Don’t apply for any new credit, including credit cards. Major red flags for lenders include late rent payments, charge-offs, debt collections, bankruptcy, tax liens, or lawsuit judgments.
The third thing to do is to check the current national averages for auto loans before you go shopping. That way, you tell if you are getting a fair deal on an auto loan. Having lower credit means you can expect higher interest, but don’t trust a loan with an interest rate more than double the national average, for example.
Finally, if you can, try to save up for a bigger down payment. This will help offset some of the taxes, fees, and interest that goes into purchasing a new-to-you vehicle. Generally, purchasing a used car requires a down payment of at least 10 percent, but try to supply more than that if you can.
Buying used cars in Columbus, Ohio or elsewhere with bad credit doesn’t have to be a headache. There are many ways you can get a loan with poor credit or work on your credit to get a better interest rate. Plus, once the financial stuff is taken care of, you can look forward to the best part of car shopping: driving off the lot in your new car.