Getting a car loan may be difficult if you have a bad credit history due to credit card debt, late/missed repayments or bankruptcy. Generally, subprime borrowers who have a credit score under 620 can’t get the best car loans available in the market. But there are bad credit car loans, or second chance finance, available for people with bad credit.
A bad credit car loan is a flexible secured loan, offering people another chance without breaking their budget. However, it’s a high-risk loan that generally comes with high interest rates and large down payments. Lenders will still need to carefully assess borrowers with bad credit before taking the risk to lend them money because they have a higher chance of not repaying the debt.
If you have had your loan application rejected, here’s how you can get a car loan even with bad credit:
Set high but realistic expectations
The first step to getting a bad credit car loan is to set high, yet realistic expectations. Expect to pay a high interest rate and a large down payment. Even if you have bad credit, you could still get a loan over somebody with the same score but with no credit, and you can still get a good deal that comes with an affordable new/used car. When your crediting rating improves, you could refinance your car loan for one that has lower interest rates.
Car loans are also inexpensive short-term loans compared to home loans and a car as collateral can be reclaimed more easily than a property. So even with the same credit rating, you can get a prime car loan compared to a subprime home loan.
Shop around for a loan
It’s a good time to shop around, as more car loans are becoming available and it’s easier to find a non-prime car loan. Make sure to get pre-approved for a car loan before you shop for a vehicle. Also, not all lenders will reject people with bad credit. However, be wary of lenders catering to subprime customers.
Here are some places where you can look for a bad credit car loan:
- Non-bank lender
- Credit union
- Insurance company
- Subprime lender
- Car dealership
Choose a trustworthy lender
Check if the lender is a member of the Credit Ombudsman Service. This way, you can get independent assistance for eligible disputes. Also check that they’re known for providing car loans and, as mentioned above, not for catering to subprime customers. Car loan providers include major banks and online lenders.
Look at loan repayment periods and avoid add-ons
Look for a car loan with the lowest annual percentage rate (APR) and the shortest repayment period. Low monthly payments for a longer repayment period isn’t the better option. Don’t go for loans that will last for a long period of time like seven years. Also avoid contingent loan terms where you purchase add-ons like extended warranties, after-market services and insurance.
Be aware of lending tactics
- Car finance package with an overpriced vehicle – Check the current market value of the car if you get a car finance package with no interest and credit checks from a car dealership.
- Falsification of financial statements – Be very careful if you’re applying for a loan with a third party, like a broker or dealer, and they tell you to adjust your financial information so you can get the loan. If so, you’re at risk of breaching the contract, committing fraud, and paying an unaffordable loan.
- Loan information – If you get a car loan, the lender should let you know in writing about the borrowed amount, interest rate, fees and charges, and the repayment amount and term.
- Yo-Yo sale – Make sure you get non-contingent or non-conditional loan terms if you apply through a dealer. With a yo-yo sale, 1 in 9 bad credit buyers are later told that their monthly payments or down payment increased.