Obtaining a car is rarely a quick and simple process, but for those with a poor credit score, getting behind the wheel can be nearly impossible. Bankruptcy, defaulted loans, unpaid credit cards, and many more details can act to lower your credit score. Some people have a hard time getting a car because they have no credit history at all - a common problem for young people. There are a number of ways to go about getting a car despite these obstacles, but the good deals are harder to find and the interest rate involved may add a serious chunk to the overall cost of the car.
Buying a car is not just something that can make your life more productive; it can also improve your credit score. Getting a car that is well within your price range and paying it off quickly can make getting your next car, a few years down the road, that much easier. Here are some steps to take to get behind the wheel, despite having less than stellar credit.
Phase 1 of 4: Understand your credit score
Step 1: Be realistic. The first step is to be realistic about the situation. A questionable credit history is a problem, but it is not an uncommon problem.
- Banks and dealerships that offer either loans or financing for cars tend to be careful about customers who may skip payments once the car is in their possession. This is because the only recourse for them is repossession of the vehicle. The whole process of repossession is complicated, and there is no guarantee that the vehicle will even have any value left, depending on the condition.
Step 2: Improving your credit score
Keep lines of credit open, and make sure that payments are up to date. Closing a line of credit or cancelling a card can deplete your credit history, some of which may be improving the score. Obviously, any credit cards need to be kept up to date payment-wise. If they are not, then take care of that before even considering getting a car.
Have an address. This may seem simple, but having an address that you have lived at for a year or more is a huge help for getting a loan to buy a vehicle. Consistency is always a good thing when improving your financial situation.
Get a phone. If you cannot be easily contacted, lenders will view this as a huge red flag and are much less likely to loan money.
Step 3: Look up your credit score. Before looking at any dealerships, look up your credit score. Some credit card companies offer free credit reports, and there are a number available online. Once you know your score, you can see how it stacks up:
Below 550 is a bad score, getting a loan for a car will be difficult or impossible. Financing will likely result in a very high interest rate.
Between 550 and 680 is sub-prime, so it’s not great but it’s definitely something to work with.
Above 680 is a good score, and a good score makes it much easier to get a car. If your score is below 680, then buying a car responsibly and making regular payments can really bump the score up.
Phase 2 of 4: Deciding on a suitable car
Now that the basics are taken care of, the actual process of finding a car can begin. Here are steps to follow to find the best deal possible:
Step 1: Research average rate. Find out what the average interest rate is for those buying a new or used car in your area. It does vary geographically, but the main reason for this is to formulate an idea of what rate you should be aiming to get. The better the credit score, the closer the rate will be to average (maybe even better than the average).
- For example, Boise, Idaho offers rates ranging from 2.19% to 3.74% for 48-month new car loan. Navigate to Bankrate’s Auto section to find out what you can expect to pay in your location.
Step 2: Find a dealership that fits what you are looking for. Are you looking for a certain brand, or just a certain price range? Is the car going to be used or new? What features are important and what features are just preferable? Some dealerships specialize in cars for people with poor credit, but these are known to have extremely high interest rates. Make a list of several dealerships to check out that fit your needs.
Step 3: Decide on a price range. Decide on a price range that works for you, bearing in mind that the lower your credit score is, the higher the interest rate. A high interest rate adds more to the cost of the vehicle by the time it is paid off than a low interest rate.
- Note: This is not your minimum price, it is your maximum.
Step 4: Find a vehicle to match your needs. Find a few models of car that work for your needs, and use those as a basis for what kind of vehicle you want to look for.
Phase 3 of 4: Finding a car to buy
Now it is time to go to dealerships and shop around; both for cars and for interest rates. Here are some tips for finding the perfect car:
Step 1: Establish minimum price. When the salesman asks what your budget is, say about 20% less than your maximum price, as the salesman is going to use the number you give as the minimum price.
Step 2: Focus on bare minimum. Look for cars below your price range and focus on your bare minimum of needs. Do you need trunk space? Access for car seats? Most safety features are standard, so don’t worry too much about that. Just keep in mind that newer cars are generally safer than older ones.
Step 3: Test drive the vehicle. Test drive the car before considering buying it, and watch out for a rough-running engine, smells that smell like burning, play in the steering wheel, and any red flags about the condition. If it seems like it’s going to fall apart, avoid it.
Step 4: Look for best price. Compare the stock of different dealerships, and shop around for the best price and interest rate.
Phase 4 of 4: Negotiating a price
Once the car is decided on, and you have a general idea of what the dealership is offering, then it is time to negotiate a price and interest rate. If the offered rate is particularly high, check with your bank to see if you can get a loan for the car from them for a lower rate. This will also give you an opportunity to leave the dealership and return another day, which almost always results in getting a better offer. Here a couple more tips for sealing the deal:
Tip 1: Have a co-signer. Don’t buy the car under someone else’s name. Instead, have the friend or relative co-sign the loan. This allows the payments made to improve your credit score.
Tip 2: Budget. Make sure the monthly payments are well within what is affordable in your budget.
Tip 3: Negotiate. The interest rate will inevitable be high if there is no money being put down on a vehicle, but don’t avoid negotiating because of the circumstances.
Tip 4: Don't feel pressured. Remember, even if you feel pressured, you can leave the dealership at any time to think everything over. This is a major purchase and you are a customer.
Now that you have a nice, new (to you) car, be sure to make regular payments. If possible, make payments larger than the minimum. Pay the car off quickly and your score will be that much better by the time you need another car.