Buy a Car with Bad Credit

Trying to buy a car with bad credit can be challenging. But you're not alone--many Americans have struggled with poor credit situations at one point or another. There are ways around it, and there is light at the end of the tunnel. There are things anyone can do to clean up their credit a little bit, find a reasonable auto loan, and buy a good quality car.

Steps

Calculating What You Can Afford

1. Determine how much you can spend. It is important to plan ahead of time how much you can comfortably afford to pay for the car each month. This will help you get the best deal while negotiating. Understand that if you have bad credit, you may have to pay more per month, so you may want to make sure that you can afford a new car.
   • First you will need to calculate your total monthly income. Subtract your current fixed expenses, such as rent, utilities, average, and insurance. Try to estimate discretionary expenses too, such as how much you spend on entertainment.
   • After calculating this, take whatever income is left, and see how much of that you can pay each month for car payments. Remember to include the cost of car insurance, fuel, and other vehicle maintenance into this cost.
2. Identify what you need the car for. How you will use the car will help you determine what car you need. This will make it easier find the right car for the right price. Consider your lifestyle and needs.
   • If you have a family with children, you may need a sedan with four doors. A hatchback or station wagon may also be useful. If you are single, you may be able to get away with a cheaper two-door coupe.
   • If you need to commute long distances, you should look for a car with more fuel-efficiency.
   • If you haul large loads, such as construction materials, you may need to look into getting a truck.
3. Research which types of car you can afford. Start researching cars in your budget. Identify the make (the company that makes the car), model, and year of each car that fits your budget and lifestyle. Try to find different options so that you can look for the best deal.
   • Look for reliable makes and models. Read reviews online, and compare cars so that you do not end up paying for expensive repairs or maintenance later on.
4. Review used car prices in Blue Book. If you want a used car, start looking at car prices in the Blue Book. The Blue Book will tell you how much particular makes, models, and years of cars are worth. This will help you make an informed decision when you buy a car and prevent you from paying too much.
5. Create a budget. Once you have identified what type of car you need and can afford, you can start saving up for it. Assume a maximum of 36 months of payments plus 20% down payment and closing costs. Even before you find the right car, start putting aside money every month so that you can afford to buy the car when the time comes.

Finding a Loan

1. Save up cash for a down payment. No matter what lender you end up using, paying the largest down payment you can afford is always smart. Even small down payments--$500, for instance—can make a difference in the terms of the loan you end up with.
   • If you don't need a car right away, it might be best to forgo getting a loan altogether, and just pay cash for an older car instead.
2. Ask family and friends for help. Friends and family may be able to help you afford a new car. Perhaps they can loan you money to help with the down payment, or perhaps they would be willing to co-sign your loan. Reach out to your family to see if there is anyone who is willing and able to help.
   • Borrowing money from friends or family can save you a significant amount of money you would otherwise be spending on interest. If you go this route, make sure to draft up a loan document in which you decide how you'll make payments to your friend or family member.
   • Remember that if a family member or friend co-signs and you default, they are responsible for the loan. This can severely damage your relationship with them.
3. Be prepared when you visit lenders. When you're visiting a lender, come with your documents in hand. Every lender needs to see several pay stubs, proof of identity (like a driver’s license), and proof of residency (like an electric bill in your name). Although they might need additional documents, those are typical, and you'll probably be able to get a good idea of what they'd lend you with those alone.
   • It’s not that any one of these things changes your credit score, how much you have to spend, or much of anything on your end. What it does change is how they look at you. Someone who is prepared is more likely to get a fair deal than a person who seems hapless and disorganized.
4. Go to your local credit union. Since credit unions are not-for-profit, they typically charge lower interest rates on loans than banks do. Although some credit unions lend to nonmembers, members typically get preferential treatment. Since it’s easier than ever to become a member of a credit union, they should be your first option for loans.
   • Not only will a credit union typically have a lower interest rate (an average of 2% compared to 4% on auto loans), they will also be more likely to take your unique circumstances into account, and see you as a more than a credit score.
   • Of course, there is a trade-off. Since credit unions aren’t trying to make a profit, they charge lower rates. Since they charge lower rates, their profit margins aren’t as high. So they do have to be cautious about lending to too many debtors in the subprime category. So think about it this way: if your credit is mediocre to poor, you might have a shot at getting a loan at a credit union. If it’s through the floor, you’re going to struggle.
5. Talk to a local bank. Most local banks are not going to be able to match the interest rate you’ll find at credit union, but that doesn’t mean they won’t have their advantages. A local bank is likely to be able to offer a few things a larger bank can’t. For example:
   • Fewer fees and lower interest rates than the larger banks. Larger banks will have technological and logistical advantages over smaller community banks and credit unions, but the network of ATMs, cutting edge apps, and a branch on every block all cost money.
   • A local bank is less likely to be as rigid as a national bank. While they probably won’t be as flexible as a credit union, they will in fact be more able and willing to lend to a person rather than a credit score.
   • A local bank is also just a bit more likely to write a smaller loan for an older car than a large bank would be, which can really be ideal for someone who’s looking to minimize their car payment.
6. Contact a national bank. While credit unions and local banks will be more flexible with respect to lending generally, don't forget about bigger banks. National banks are a big part of the conversation when it comes to lending to people with bad credit, and with good reason. Certain national lenders have a large presence in the subprime auto loan market, and they lend a lot of money that puts a lot of people on the road.
   • For example, Wells Fargo and Capital One Auto are two of the biggest players in the subprime auto loan market, and two of the biggest banks, period. If you’re having trouble getting financing from more low interest lenders, take a look at these guys. They might charge higher interest rates than a credit union, but they won’t be as high as some of the online lenders.
7. Look online. Online lenders are a pretty mixed bag. Whereas some lenders, like OneMain, have a decent reputation, others, like Santander, have anything but. Regardless, they are flourishing at the moment, and subprime buyers are making up the largest segment of auto lending. You can very well find some good deals, but you might end up getting fleeced as well. This is one area where you have to do your homework even more than usual.
   • There's no one place you can go to get reputable, unbiased reviews of every single online lender in one place. Before you apply, you're just going to have to investigate their reviews and reputation. A good place to start is the Better Business Bureau, but that's not going to give detailed information about the bank as a lender, but rather as a business in general. If an online lender has anything other than an A rating from the BBB, look elsewhere.
   • The Consumer Financial Protection Bureau would be another good resource for research. That agency regulates financial entities as they relate to the public, so you could find out if a lender was under investigation or had a large number of complaints.

Finding the Car

1. Consider bank or lender repossessions. Buying a car that has been repossessed by the bank can sometimes save you between 25 and 40% of the car’s cost. Keep in mind that you cannot have a mechanic check these cars beforehand, so you may end up buying a lemon. Still, if you’re willing to take the risk, you can research local auctions or look online for dealers.
   • Repo cars are sold as-is. The car may have maintenance issues that you will need to address.
2. Consider private sellers. You can buy a used car from its former owner if you are willing to take on the paperwork yourself. You can usually save quite a bit of money this way. Look in your local newspaper or online for people selling cars in your area. You might also ask around your social network to see if anyone is thinking of selling their car.
   • Private sellers may be more willing to negotiate on the price of the car. Don’t be afraid to haggle.
   • Remember that when you buy a car from a private seller, you have no legal recourse if there is something wrong with the car. You are responsible for filling out the paperwork yourself.
   • Always get a VIN history report on any car that you buy from a private seller. It is also highly recommended to have a mechanic check the car out before you purchase it.
3. Buy from reputable dealers. Usually, the most reputable dealerships in a given area will be franchise dealerships and national chains like CarMax. A franchise dealership is a dealership with the sole license to sell new models of a certain make within a geographic territory, like "Smith GMC," or "Jones Cadillac." Franchise dealerships always have an inventory of used cars they've acquired from trade-ins, so it's best to start there.
   • After you've looked at franchise dealerships and national chains, try smaller dealerships who use bank/credit union financing, and sell higher mileage used cars. However, stay away from dealerships acting as their own lenders (buy here, pay here lots). Even though they might have some attractive sticker prices, they are notorious for selling lemons, concealing damage, and all sorts of other things.
4. Get a vehicle history report. Make sure you check the vehicle’s history before you buy it. Carfax is the most famous of all the services conducting vehicle history reports, but https://www.vehiclehistory.com/ offers the same service for free.
   • You’ll want to watch out and see if the car’s ever been wrecked, declared a total loss, had flood damage, is a salvage title, or ever had the odometer tampered with. If it has, it’s probably a car you want to avoid.

Buying the Car

1. Negotiate price with the seller. Once you’ve been pre-approved by the lender, you'll know what you can spend. But there's no reason to share that information with the dealer. If you walk in saying you've been pre-approved for $15,000, you'll probably end up spending $15,000. Instead, try and do all the negotiation you can beforehand.
   • If you think you’ll be tempted to show it to the salesmen, don’t come to the dealer with your pre-approval paperwork at all.
2. Consider dealer financing if available. If you are buying a car from the dealer, they may offer you financing. This financing usually has higher interest rates, but the dealership can offer you other incentives, such as rebates or no-interest periods, that may bring down the cost overall. Talk to the dealer, and get a quote for financing to see if it is right for you.
   • Some dealerships will advertise that they finance people with no or bad credit. Typically these dealerships charge extremely high interest rates. It is better to see if a bank, credit union, or reputable dealer will give you a loan first.
3. Ask for a mechanic inspection before closing. Before you buy a used car, ask the dealer if you can have a mechanic examine the car to make sure that there are no problems. Always get your own mechanic to perform this service. They should check out the car’s brakes, electrical system, compression, transmission, and other parts to prevent you from buying a defective car.
4. Complete the purchase. Once you buy the car, make sure that you have the title transferred into your name. You should doublecheck that the VIN on the title is the same as it is on the car. The odometer on the car should also be the same or higher than it is listed on the title. Go through all of the proper paper work, and submit it to your state DMV.
   • Be sure to get a new license plate for the car registered in your state of residence.
5. Buy the required insurance. You must have insurance on your new car. Contact a few insurance companies to find the best rate. If you had insurance on your old car, contact your insurance agency and tell them that you have bought a new car, so that they can adjust your insurance. This will ensure that your insurance will cover the new car.

Cleaning up Your Credit Score

1. Check your credit report for mistakes. Roughly one out of five Americans has an error on their credit report, and until you examine yours, you won’t know if you fall into that group, and if you do, how seriously it could be damaging your credit score.
   • By law, every American gets one free copy of their credit report each year from each of the major credit bureaus. Get your at free report at https://www.annualcreditreport.com.
   • Should you spot a mistake, you need notify the credit bureau in writing and by certified mail. Along with the notification, forward any copies of documents that support your position. It isn’t mandatory, but wouldn’t hurt to notify the creditor in the same way at the same time. In any event, the credit bureau has thirty days to investigate your claim. If they do not resolve it to your satisfaction, contact the Consumer Financial Protection Bureau (CFPB) at http://www.consumerfinance.gov/ and file a complaint.
2. Negotiate with creditors to remove negative items from your report. After you’ve examined your credit report, you might notice a few blemishes on your record. Not errors, exactly, just relics from when you were younger and poorer. It’s by no means guaranteed, but you may be able to negotiate those off of your report if you reach out to the creditor.
   • Tell the creditor you’d be willing to pay them and settle the debt if they would remove the items from your credit report. They may counteroffer, suggesting they indicate instead the debt was “paid as agreed.” That’s not as effective, but it looks better than a delinquent account. Whatever you agree on, get the agreement in writing.
3. Reduce credit card debt to below 30% of credit line. One of the components of your credit score is the proportion of available credit compared to the total credit. If you’re using more than 30% of your available credit, it hurts your score.
   • So if you do need to close out an account, you need to pay down enough of the remaining credit to balance the loss of that line of credit.
4. Don’t max out your cards. Don't max out your credit limits for the same reason you don't abruptly close lines of credit--you're using too high a proportion of available credit. If you find you’re going to need a larger line of credit than the one you have, either ask your creditor to raise the limit or apply for another card. That way you can spread the same amount of money onto several sources of credit, keeping your overall utilization low.

Quick Summary

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See also

• Deal with the Finance Manager at Car Dealership
• Buy Cars at Auction
• Buy Then Sell a Car Impounded by the Police
• Compare Used Cars
• Find Out How Much a Car Is Worth
• Apply for a Used Car Loan
• Redeem Your Repossessed Car
• Buy a Fuel Efficient SUV
• Buy a Used Car Online
• Buy an Alternative Fuel Vehicle

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