The graph demonstrates the impact your FICO Score, the most widely used credit score, has on your interest rate, monthly payment and total cost. The exact same car can cost thousands of dollars more depending on your credit score.
What are the Credit Score Requirements for an Auto Loan?
Shop around for direct lenders like credit unions or banks and get pre-approved for an auto loan. Then take your offer with you to shop for a car. Car dealers can sweeten the deal with discounts like taking money off the list price if you finance with them. Any money saved upfront with the discount would be lost on the backend with more months of more interest. However, those incentives are usually reserved for customers with excellent credit so polish that credit score before you go shopping. Instead, they act as a go-between with customers and banks. Dealerships take a loan from the bank and tack on a few percentages to the interest for themselves.
These are known as in-house financing and the house definitely wins. BHPH dealers are notorious for offering high interest loans to subprime borrowers. It a big reason why captive finance companies have become so popular.
Learn How to Improve Your Credit Report to Apply for an Auto Loan
Still, banks are a good place to get preapproved as a reference point. A typical rate on an auto loan from a credit union is about 1. LendingTree, MyAutoLoan and Clearlane a branch of Ally Financial are three online services that collect a number of loan offers from different lenders so that you can easily make comparisons. LightStream offered by SunTrust issues online loans to customers with excellent credit, and Auto Credit Express does the same for those with poor credit. These types of companies have been in the news for shady business practices like illegal repossession and bating customers into loans with extremely high interest rates.
One alternative financing option that could be appealing to a home owner is taking a home equity loan to pay for a new car. The rates on home equity loans should be close to what you would pay for an auto loan. The advantage here is that the interest you pay on a home equity loan is tax deductible.
When you shop for a car, the number you want to pay the closest attention to is the total payment. You should be comparing loans and how much it actually will cost you to get a payment you can afford. Look at the graphic below to see how much you can save by buying an older version of the same model of car. A CPO has been inspected, refurbished and certified by the manufacturer that it is in good condition. Typically, they also come with an extended warranty and similar perks you would find on new cars like special financing offers and other benefits.
What Do Lenders Look for in a Credit Score?
Bottom line is that the bottom line is a lot more attractive on a CPO or used vehicle than a new one, especially if you must borrow money. Take it a step further and calculate the depreciation. Or take a two-year-old certified preowned vehicle and stash the extra money for a rainy day.
It is not impossible to buy a new car with bad credit, but lending institutions can make it very difficult and definitely expensive.
It is not unusual for them to ask for a substantial down payment and charge an interest rate that is at least 10 points higher than someone with good credit pays. If you still owe on the vehicle, the amount of trade equity you have can be used. Trade equity is the difference between what a vehicle is worth and how much you owe on it.
Having equity means the value the dealer is willing to give you is more than the payoff amount on your loan. If you don't have enough trade equity to meet the down payment requirement , you can combine its value with cash. However, when you owe more on the loan than your car is worth, you have negative equity, which can complicate the situation.
In this situation, you may be asked to pay off the negative equity with cash, and you'd still need to come up with the money to meet the down payment requirement.
How Your Credit Score Affects Car Financing
In some cases, the lender will allow you to roll the difference over into your new loan. Keep in mind this increases your monthly payments and results in you paying interest charges on the negative equity, so it's a last resort option that's best avoided. If you're looking to use your trade-in on a bad credit auto loan , there are some steps you'll need to take in order to prepare for the process. The first thing you'll want to do is get an idea for the value of your trade-in. You can visit vehicle valuation websites such as NADA to get an estimate on how much your car is currently worth.
Once you have an idea, the next steps are to gather up some documents and get a few quotes. There are four things you'll need to bring to a dealer, but your state may require additional documents: Driver's license Vehicle's title Auto loan payoff amount and account information Vehicle's current registration.
To get quotes, you'll want to visit at least two dealerships to see what they're willing to offer. They'll do an inspection of the car, and give you a trade-in quote. If you want, you could only go to one dealer and get a quote, but having more options is the best way to make sure you're getting the most fair offer possible. If you want to trade in your car but there's negative equity involved , you may still be able to. There are a few downsides to trading in a car with negative equity you should be aware of. First, not every lender is willing to let you roll over the negative equity into the new loan, so you may have to pay the difference between what you owe and what your trade-in is worth out of pocket.
Second, if you're able to roll over, you're still responsible for the negative equity — it doesn't go away. You'll be financing the negative equity on top of the selling price of the new car. Your monthly payments will increase, and you'll pay interest on the negative equity.
You can absolutely trade in a car with a loan on it , but any money you get has to be used to pay off your current lien before anything else. You won't have to handle this — your dealer will take care of everything involved with paying your old lender and getting the title to the car. However, paying off your existing loan is easier if there's equity in your vehicle. Equity is the difference between the actual cash value of the car and the amount you owe on the loan. If you owe less than the car is worth, there is equity.
On the other hand, if you owe more than the car is worth, you have negative equity. This amount can be paid out of pocket, or rolled into your new loan. Be aware that rolling any additional amount into a new loan isn't always an option, and it'll end up costing you more in interest charges over the term of your loan.
If you have negative equity in your vehicle, you may want to reconsider trading it in until you're in a better equity position or you can cover the difference out of pocket. Your chances of getting approved to lease a car with bad credit aren't very high, although they're better than they were a few years ago. Even if you were to qualify, leasing will be more expensive and you'll face more restrictions than drivers with good credit. Leasing is growing in popularity because it allows car buyers to get into a new vehicle with the latest gadgets, payments are typically lower than finance payments, and the car is covered by a warranty the whole time.
However, if you have bad credit, you likely won't be able to qualify for those awesome lease deals you see and hear in advertisements. If you're trying to lease a car with poor credit, you can expect to only qualify for a lower program tier — if you're able to in the first place. This limits the vehicles you'll be allowed to lease and makes it more expensive.
Also, you shouldn't confuse a lease-to-own financing program with a traditional new car lease.
While dealers that offer this include "lease" in the name, this type of financing results in you owning the car when you complete the payment schedule. Lease-to-own programs, sometimes called rent-to-own financing, are similar to buy here pay here loans. Dealers that offer it typically don't use third-party lenders, so they won't check your credit. While this makes it easier for bad credit buyers to get approved, it also means the dealer may not report your payments to the credit bureaus so the loan won't help you improve your credit.
While it's typically hard to get approved to lease a car with bad credit, an alternative is to try to get a subprime auto loan through a licensed dealership. This is easier to qualify for than a lease, and you can get the car you need while also getting the chance to improve your credit.
What is a good credit score?
Getting approved for a car loan as a first-time buyer without a cosigner can be difficult, especially if you have a limited or nonexistent credit history. As a first-time car buyer, it's important you plan ahead and do some research. What one lender is willing to approve you for can be different from the next. To improve your chances, make sure you do these three things: Pull credit reports : Always double check your credit score and credit reports before you look for financing, even if you don't think there's much there.
Know where your credit currently stands, and check for any inaccurate marks on your reports that you can dispute and have removed.