Tips to Buy Car With Bad Credit
Just because you find yourself with a less than stellar credit score, your need for safe and reliable transportation does not change. A bad credit score does not mean that you are unable to purchase a vehicle, but it does make the process more challenging. Read on to learn the step to step process for how to buy car with bad credit.
Research your credit before going shopping
Before stepping foot into a dealership, it is important to understand how bad your credit is and what is causing your low score. A low credit score can be the result of old unpaid medical bills, a foreclosure/eviction, or simply missing a few payments on a store credit card. Life also can cause a drop in your credit score. Things like losing a job, going through a divorce, or having a major medical event can all cause you to fall behind on paying bills.
Thankfully, there are some great free tools available to help you track and monitor your credit score. My favorite tool is Credit Karma. It is free to use and gives you a great overview of your current credit picture and offers helpful suggestions for ways to improve your credit score. Best of all, you can track your credit score over time to see if it is improving.
Stop Utilizing Your Credit and Try to Get Any Delinquent Items Current
Before trying to open a new credit line, such as a car loan, it is a good idea to let your credit stabilize for 1-3 months. This lets you prove to the lenders that you can meet your current credit obligations, and several months of on-time payments can help to boost your credit score.
Also, utilize this time to pay down or pay off any outstanding debts. From my time in a dealership, I have seen how even a $100 unpaid medical bill in collections can significantly impact someone’s overall credit score. Simply paying off this old bill and waiting until the change reflects on your credit report can help your score rebound quickly.
Develop A Written Budget
This step has nothing to do with shopping for a vehicle, but has everything to do with making sure that you can pay for it! Developing a written budget is an important step to getting your financial house in order. It will allow you to understand where your money is coming from, and also where it is going.
You can utilize many different methods to accomplish this task. A pen and paper can work well, as does a spreadsheet, but my favorite tool is EveryDollar from Dave Ramsey. This is a free budgeting tool that allows you to simply track the money that is coming in and going out every month. It also is very helpful in tracking your debt over time as you strive to pay it off.
Whatever method you choose to use, just make sure that you budget for your new car payment, additional car insurance, and any other associated expenses. For example, you commonly have to pay state property tax soon after purchasing a vehicle. Don’t forget about this item and have it cause you additional stress.
Try to Get Pre-Approved for an Auto Loan
The next task to buy car with bad credit is to try to get pre-approved for a car loan. Dealerships will commonly mark up the interest rate, especially for someone with bad credit. That’s why it is a good idea to have a pre-approved option before ever stepping into a dealership. This gives you a baseline for you to compare options from the dealership without getting taken advantage of.
Credit unions are the best place to get pre-approved for a car loan with bad credit. They have super competitive rates and are flexible with their lending guidelines. What this means for you is that they will look into your account history and who you are as a person, rather than just your credit score and income. Even if you don’t have a relationship with a local credit union yet, you should start one today. It will be incredibly helpful when you need to make other large purchases in the future.
Dealerships can provide financing for a vehicle, but their rates tend to be higher than what you can get through a credit union. If you choose to finance your new car at the dealership, just be sure to check the interest rate and term with other lenders to make sure that it is competitive. The interest rate on your loan is an incredibly important factor in the total vehicle cost, so be careful!
Research to find the right pre-owned vehicle
Now you can begin the process of finding the right vehicle for you. I would encourage you to not look at new vehicles or vehicles that are older than 5 years and higher than 60,000 miles. Instead, you should look at vehicles that are 1-4 years old with low mileage. This will allow you to avoid a lot of the depreciation of a new vehicle, while not having lots of maintenance associated with an older vehicle. It’s the best of both worlds!
You need to purchase a vehicle that you will love driving for a long time, but don’t let vanity step in front of what makes sense. Be sure to carefully research the vehicle you are interested in by reading consumer reports and other online sources to see how reliable they are! The last thing you want is to have a car payment and a large repair bill!
Negotiate with the dealership
Now that you have found the perfect vehicle that fits within your budget, it is time to make sure that you don’t overpay. Negotiating with a dealership doesn’t have to be stressful! What I recommend is setting up an appointment to test drive the vehicle and provide the dealership with your contact information when your test drive is complete. Then, simply leave the dealership.
This does several things to help you save money. One: it proves that you exist because, well, you test drove the vehicle! It also helps you communicate with the dealership via email or phone and prevents you from making an emotional decision while you are at the dealership. Whatever you do, please do not purchase the vehicle on the first visit to the dealership. I can just about guarantee that you will overpay. Just a little bit of patience has the opportunity to save you money.
Read the Paperwork
This step is one of the most important in this guide. Be sure to read every document before signing it in the Finance Office. Don’t just let the finance manager say “sign here.” Instead, take the time to read and understand what you are agreeing to. This will prevent the dealership from inserting any extra charges or products into the deal without your knowledge.
The important thing to remember here is that you haven’t purchased the vehicle yet. You are well within your rights to get up and walk out of the office. Especially, if the Finance Manager is pushing a product or not being forthcoming with information.
Avoid Buy Here Pay Here
Buy Here Pay Here might sound appealing. It might even allow you to get into a nice car quickly and easily without having to jump through hoops. However, it is the most expensive way to buy a car and should be avoided.
With Buy Here Pay Here car dealerships, it is hard to ever own your car. Please invest the time to get a traditional car loan and save yourself thousands of dollars in the process.
Make Your Payments on Time
Now that you have your new vehicle, it is important to make your payments on time, every month. This will help rebuild your credit score and show to future lenders that you are using credit responsibly. Utilize your written budget from step 4 to forecast out your cash flow for the month and make all required payments on time. This is essential to starting the process of rebuilding your credit report.
Enjoy Your Car and Don’t Shop Again
Congratulations, you have a new vehicle! Now, it is important to not shop again for a long time. There will undoubtedly be new features and technology that comes out on vehicles over the next several years, but you need to enjoy the vehicle you just purchased. Just relish in the fact that you purchased a vehicle and make it your goal to pay off your vehicle on time and without missing any payments. You’ll soon realize that the best kind of car is one that is paid for.
Refinance Your Purchase
After making 12 – 18 on-time payments, you might want to consider refinancing your car loan. This will help you lower your interest rate and payment. This is only possible if you have made your payments on time and your lender can see that you can easily handle the debt. Refinancing is a good way to save money by paying less in interest over the life of the car loan.