How to Buy a New Car with Bad Credit
Buying a new car with bad credit can be challenging. Many people simply start by searching the internet for lenders and services that provide loans to people with bad credit. Few people release however that there are two categories of lenders, Direct Lenders and Indirect lenders.
Car Loan Lender Overview
Direct Lenders
Direct Lenders such as banks and credit unions provide loans directly to consumers. Approved car buyers can shop at the dealership of their choice much like a cash buyer would. The advantage of using direct lenders is that the rates, terms, and maximum loan amount are known prior to shopping for a new car. This process is similar to getting pre-approved for a home loan. Getting pre-approved allows you to set your maximum price expectations and avoid the frustration of getting turned down on your dream car because the price exceeds your budget.
The disadvantage of using a direct lender is that many of the captive OEM finance companies often offer low rate or 0% car deals
Indirect Auto Finance Companies
Most Direct Lenders, however, do not provide loans to people with credit scores below 600, this space is dominated by indirect lenders that only offer bad credit new car loans through their new car dealer partners. For example, if you were to apply for a loan with Ford Motor Credit and were approved, the loan could only be used at a Ford new car store.
Indirect Lenders have strict guidelines regarding the amount they will lend based on the value of the vehicle and the monthly income of the borrower. Because of this, car buyers with bad credit should expect to have a cash down payment to lower the overall loan to value. New car buyers with bad credit that are tight on cash can improved their chances by focusing on new cars with rebates.
Buy Here Pay Here Dealer
For those with credit scores below 500 the only alternative may be a Buy Here Pay Here Dealer. Buy Here Pay Here Dealers lend their own money to car buyers so they purchase a vehicle from the dealership's car lot.
There are many disadvantages of Buy Here Pay Here loans. First, the dealership is not required to report your payments to the credit bureaus; if you make timely payments it may not improve your credit score. Second, typically a cash down payment of greater than 20% is required. Third, the dealership often charges the maximum usury interest rate and further marks up the car price to increase the effective interest rate of the transaction. Lastly, the loan amounts are small so the borrower may end up with a high mileage older used car.
Before You Apply
Know Your Credit Score
Your credit score will not only determine whether you are approved for a new car loan but will also determine the repayment terms of the loan. As you can see from the table below rates vary dramatically based on your credit score. By knowing your credit score you can determine if it’s worth the time and effort to improve your credit score prior to applying for a new car loan. Unsure of your credit score? Click Here
National Average Interest Rates Base on Credit Score
| Rating | Score | *New Rate | Used Rate | Max Term |
|---|---|---|---|---|
| Great Credit | 781-850 | 5.61% | 7.43% | 75 |
| Good Credit | 661-780 | 6.88% | 9.33% | 75 |
| Fair Credit | 601-660 | 9.29% | 13.53% | 72 |
| Poor Credit | 501-600 | 11.86% | 18.39% | 72 |
| Bad Credit | 300-500 | 14.17% | 21.18% | 72 |
| No Score | 0 | 19.95% | 25% | 72 |
Improve Your Credit Score
If your credit score is on the borderline of one of the breakpoints above, consider using a service such as Experian Boost to increase your score. Sometimes an additional few point increase in your credit score can lower the car loan interest rate and end up saving you money over the length of your loan.
Where to Apply
If your credit score is between 500 and 600 we recommend that you use a reputable referral service or apply directly with a new car dealership.
Referral Services
If you are more concerned with the body style and getting the best deal on your new car purchase, a reputable referral service may be the best choice for you. There are many referral services that will match customers with bad credit with dealers that have indirect lenders that cater to people with bad credit. If you take this approach the referral service we recommend is Auto Credit Express. Auto Credit Express has been in business since 1999 and has a 4.5 rating on TrustPilot with over 3,000 reviews as well as positive review ratings on Google and Consumer Affairs. To get started with Auto Credit Express visit our Bad Credit Car Loan page and complete the short form to see if you qualify for their programs.
Apply Directly with a Dealership
If your goal is purchase a specific make and model then applying directly with a new car dealership is your only option. Before applying directly with the dealership do your homework first. Start by reviewing the dealerships inventory, once you locate a vehicle you would like to own contact the dealership to see if the vehicle is available for immediate sale.
Due to the inventory shortage many dealerships list incoming vehicles on their website before they hit the lot, in extreme cases, it may take up to 90 days before the vehicle arrives on the lot. To reserve an incoming vehicle dealerships typically require a cash deposit.
If the vehicle is available for immediate sale, ask to speak with the Finance or Internet Manager. Before you apply let the Manager know your credit score, monthly income, cash down payment available, and the price of the unit you are interested in purchasing. The Manager will have a strong opinion regarding your changes of approval. If you have a good feeling after speaking with the Manager, complete the dealership's application, if not, repeat the process with a different dealership. This process will limit the inquiries on your credit report