Getting a Car Loan with Bad Credit
A car is an important part of a teenager’s life, it is a social tool for meeting up with friends and hooking up with that cute girl in class. When you are a college student, a car becomes even more important. Aside from the social benefits of having a car, there are just so many projects and out of town trips that you will have to take for some of your classes that it becomes an important investment. As a student, we can sometimes get lucky enough to find a good job that would help us support getting a used up car that is within our budget or better yet get a car loan to buy a car that is far more serviceable than a beat up model that is basically a tin can on four wheels.
Except for one little problem: you can’t get a car loan. Maybe you experienced a tight financial fix that forced you to overcharge your credit cards or missed a few bills and payments. You’ve somehow managed to get things back on track, but your credit history took a beating and your score’s just too low to get any of the banks to trust you. To them, you’re “high risk” and it doesn’t seem to matter that your lifestyle has since changed. No credit score, no loan.
The Challenge of a Poor Credit History
A bad credit history can often feel like a millstone around your neck. Even after you’ve got your budget under your control, your credit score can make it seem near-impossible to get a loan. It’s like you’ve been branded for life: “This is the guy who missed his payments, and you’d be a fool to trust him again.”
It isn’t fair, especially since almost everyone goes through a financial crisis at one point in their lives, and your credit score may not reflect all the positive changes you’ve made since you maxed out your credit cards. The challenge is to rebuild your credit history, which ironically happens only when you take a loan. When you make regular payments, you prove once again that you can be trusted. Ironically a car loan may be precisely what you need to put your credit history on the right track. But how do you get one?
Evaluate your Financial Situation
Before you start daydreaming of bringing home that Porsche, look at your financial situation. How much can you afford to pay for a car? Experts say that the rule of thumb is that your total debt payments—that includes credit cards and household bills—shouldn’t be greater than 30% of your total yearly income.
So calculate how much you’re already paying in terms of debts and see how much you can afford in additional monthly payments. If you’re going to take a car loan, you’ll have to first lower your debt-to-income ratio. Simply put, pay off other credit cards, and see if there are any ways of cutting corners.
This step helps prevents you from getting into any credit trouble. And it also is proof that you can handle this debt, especially when supported by proof of income.
Raise your Credit Score
You should get a copy of your credit report . Check thoroughly for any inaccurate records or errors—there are cases of mistaken identities or payments that haven’t been reflected.
If you have a low credit score, try to raise it by making regular payments for several months before applying for a report. You should also avoid making new charges, or opening any new credit cards. This can temporarily lower your score, since those companies will ask for your credit history.
Downpayments and Collaterals
Some lenders are willing to approve the loan if you make a larger downpayment on the car. This will let them sell the car if you happen to default on the payments. If this is the route you want to take, then you’ll have to save some money for several months, then just take a loan for the remainder of the amount. Since you’ll be borrowing less than the car’s appraised value, the chances of being approved increase.
Here’s another strategy. Some lending institutions will take even high risk loans as long as you are willing t put up something for collateral—another car, for example.
Higher Interest Rates
Some lending institutions that specialize in high risk loans will charge higher interest. It may be frustrating, but be comforted that as you make regular payments, you improve your credit score—and eventually you may be able to transfer the loan. Or, cut your losses by paying larger monthly payments—the longer the payment period, the more interest incurred.