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It is more complex than ever to get a car loan in today’s economic climate if you have bad credit. Your credit score plays an important role when applying for loans and can make the difference between being approved or denied. A poor credit score often can be caused by too many missed payments on your part or because of unpaid debts from someone else that you are responsible for as well. If this is the case, there are some things you can do to get pre-approved for a car loan with bad credit.
The following article will discuss some ways that may get you back on track so that one day soon, you’ll be able to get the car of your dreams without any hassle.
What is a Car Loan and How Does it Work?
Before you can get pre-approved for a car loan, you should first know what one is. A car loan is a type of auto financing that you get from a bank or car dealership. It lets you borrow money to get the car you want and get it now without having to save up for it.
Before the financial crisis, many people took out new loans every year to get new cars. But today, banks are much more strict with offering these deals. Many people wonder should you get a Carmax pre-approval if you have no credit when shopping for cars there. You can still get pre-approved for a car loan with bad credit, but there are some hoops you may have to jump through initially.
How to Get Pre-Approved for a Car Loan With Bad Credit
If you have low credit, getting approved for a car loan is not impossible. However, you have to remember that some dealerships get almost all of their business from car loans. For this reason, the dealership will only get you approved for a loan if they get reasonable compensation in return.
While this may be difficult for the average citizen with lousy credit, there are things you can do to get pre-approved. The following below is an example of how to get pre-approved for a car loan with bad credit:
You Will Need Income and Employment
The first thing you will need for any car loan pre-approval with bad credit is a stable income. You will also need to get a letter from your employer stating that you are still working and getting steady paychecks. This is proof that you have the money to make payments on time.
Some lenders may use pay stubs instead of a letter from an employer. But, this is rare because many people get pay stubs but cannot get off a loan if they get behind on payments.
You Will Need Financial Verification in the Form of Bank Statements or Tax Returns
Another thing you will need to get pre-approved for a car loan with bad credit is bank statements and tax returns. This shows that you have money coming into your account, which means you can pay back any loans you get. The financial documents will also verify your income so that the lender knows how much you make each month.
All of your information must be as accurate and up to date as possible when applying for loans. If something has changed recently in your life, get it updated with the lender. An inaccurate document could get you denied in this situation, so get your financial documents ready before going to get pre-approved for a car loan.
Increase Your Income and Get Yourself Out of Debt At Least 6 Months Before Applying To A Car Dealership
To get approved for a car loan when you have bad credit, your first step is to be out of debt within six months before applying. To achieve this, think about how to create a personal balance sheet to track your finances. This means that if you get a car loan with bad credit, it will be for a newer vehicle than the current ones on your driveway. You’ll also get this type of loan after you have saved up enough money to pay off these debts and get out of debt completely.
In addition, getting out of debt may increase your chances of getting approved for a car loan by raising your income level. This particular factor is not as important as being debt-free, but it can get you the approval you need to get on the road with a newer or used vehicle. Know the differences between outstanding balance vs. principal balance and what affects your credit score.
Get Professional Financial Advice From A CPA or Banker
After you get out of debt, call a professional to get you on the road to getting approved for a car loan. This person should be an accountant or financial planner that can get your credit fixed up, so you are ready to get approved for any loan in the near future. They will also tell you how much money you need to get out of debt and get on the road to get approved for a car loan.
Anyone can get out of debt, get themselves cleaned up, and get approved for a car loan with bad credit if they have enough motivation. Although it may take some time to get your finances in order, you’ll be able to get back on track quickly once you start getting things done.
Work on Your Credit Score
Another thing you can do to get pre-approved for a car loan with bad credit is to get your credit score up. When you get an auto loan, the information on this score will get reported as part of your financial history and make it easier to get more financing in the future.
The credit score numerical ranges are listed below:
- 750-850 The Best Vantage Score
- 600-749 Good to have a score in this range
- 350-599 Bad Credit
Anything below 350 is considered abysmal credit.
If your credit score is below 560, it may be difficult for you to get approved unless you pay off all of your debts entirely and work on getting better financial habits.
However, repairing your credit score may take some time because it is based on your history. If buying a car, the credit score needed to buy a car at Carmax can help guide you on the necessary steps as well.
There is no magic trick you can use to get it back up in a short period. But with enough discipline and focus, you’ll get your score back up to an acceptable or good level before long.
Get Your Financial Documents in Order
You will most likely get approved based on your assets when you get pre-approved for a car loan with bad credit. This means that the only thing that will get you approved is if you have enough money in your bank account to pay off the dealer or lender.
This may require having certain documents in order, including your tax return (unless you are Amish – see do Amish pay taxes) and bank statements from the past two years.
One of the pros of having a personal accountant is that this information is just a phone call away. It also means that anything with your name on it should be organized for easy access when asked for by a dealer or lender.
Shop Loan Rates
Shopping loan rates with bad credit can make a massive difference to a successful car loan pre-approval. This means that you should have a working knowledge of all the rates based on your credit score and finances. It is also important when you get pre-approved for a car loan to know what kind of rates are being offered by different lenders and how they vary to make an informed decision. Make sure to ask loan lenders how to find your finance charge so you know how much you will be paying each month.
An excellent example of this would be mortgage financing. A person with bad credit can still buy a house, but they will typically pay higher interest rates because they may not qualify for as much funding or pay off their loans as quickly as those with better credit scores. The same general rule goes for getting approved for auto loans with bad credit too.
Get Advanced Pre-Approved for A Car Loan With Bad Credit At Least 30 Days Before You Plan To Look For One
Because there are so many car deals out there, get pre-approved as soon as possible when you get out of debt and work on getting your credit score fixed up. The longer you have this approval, the better chance you can buy the vehicle you want without any problems or delays. Check the dealership’s website or call them several weeks before going there to get a better idea of how long you may have to wait.
Consider Buying Used Vehicles
Consider used cars if you don’t want to invest in a newer vehicle or have trouble getting pre-approved with a low credit score. If you are wondering and searching for how to repair your credit yourself, you should consider used cars. This will not only get you into your dream car, but it can also save you money in the process. The overall cost of the vehicle may be higher when you get pre-approved for a car loan with bad credit, but it should get easier to get approved if you buy an older model vehicle.
In addition, used cars tend to depreciate less than newer ones do, which means that your new car will not lose as much value over time. It is common for dealerships to have loans specifically designed for people with lower credit scores who want pre-approved car loans on a used vehicle.
A few things to seek are dealer incentives and manufacturer rebates that can make your monthly payments cheaper. Look forward to your search by knowing what kind of financing options you need or want well before going into your local dealership.
What If You Can’t Get a Car Loan For Your Dream Car Because of Your Bad Credit?
It’s not the end of the world if you don’t get approved for a car loan. You can get approved somewhere else and get the car you want that much sooner, so don’t get discouraged if it doesn’t happen right away.
There are all kinds of other institutions and dealerships that will get you approved for a car loan, even with bad credit. Some dealers specialize in bringing those with questionable credit into an excellent vehicle at an affordable price.
Non-Traditional Dealership Financing
Some of these dealerships are called BHPH or Buy Here Pay Here car lots, and they are often family-owned, where you get approved for a car loan based on your down payment and ability to make the monthly payments. It is not uncommon for these dealerships to reach people with lousy credit get pre-approved for an auto loan even when traditional dealerships won’t.
If you can get pre-approval by visiting one of these types of dealers, then it might be worth looking into buying from them instead. Their interest rates vary, but some tend to offer better interest rates than others because they have less overhead costs than regular dealers do. Some may offer income share agreements as a means to financing too. A down payment is usually required.
Use a Co-signer
If you struggle to get your pre-approval, consider using a co-signer to get pre-approved for a car loan with bad credit. A co-signer is a second person who will agree to pay off the loan if you can’t. This is common in contract situations such as buying and selling houses or purchasing cars from private owners, but they can be used on auto loans.
Using a co-signer gets pre-approved more easily because it’s harder for the lender to get their money back if someone defaults on the loan. If you get pre-approved with your co-signer, then this makes your chances of getting an approval without one much higher because of this fact too.
Consider a Larger Down Payment
You can also give yourself a better chance of getting approved for an auto loan by making a larger down payment when you get pre-approved. This shows the lender that your purchase is something that you are serious about.
In common with how to save money for a house fast, down payments are key. Some lenders will require as much as 25% down before giving out their approval, so make sure to check with them first before buying if this is what they prefer instead. That being said, keep in mind that the more money you put down initially, the less interest you will have to pay on top of it all, which can save you money in the long run!
If your score is 525 and you apply for a car loan, will the lender accept your application? Yes, but they will charge you higher interest rates because of it. Some auto dealerships offer special programs for people with lower credit scores or who have no credit history to help them build their scores while obtaining new cars.
To get pre-approved by a dealership, you need to go in and fill out an application completely, which will then be tracked through Experian’s Credit Tracker service. If you qualify on paper, then you go ahead and purchase the vehicle. The dealership should give you the money that day unless there is unusual information found during the check-up. As long as you have been pre-approved by the dealership, you should be fine to get approved in weeks.
If you want to buy an electric car or if your state has a rebate program for purchasing one, then it’s highly recommended that you get pre-approved for an auto loan before going to the dealership. That way, you can have a certain amount of money at your disposal already and won’t have to go through financing later on after you purchase unless it’s already approved in advance. If you decide to finance the car, the lender will add that into the total cost because they know that electric cars are more expensive than regular gas-powered ones.
No, having credit equals pre-approved status, but if you do not have any credit history or your score is very low, like below 350, you would probably need pre-approval from a dealer who can get started with your application. This will help the dealer’s finance department build good credit on your behalf and prove that you are a good bet when it comes down to getting financing. If your credit is low, they might even ask if anyone could cosign for you to get some security, and they don’t lose their money later on.
If you are looking to get pre-approved for a car loan, then it is important that you understand the different types of auto loans available and what your options are.
The first thing we recommend doing if you can’t seem to find a lender who will offer an auto loan with bad credit is simply asking around. It might be as simple as talking to people in your social circles or even calling up some family members or friends.
You could also speak to a dealership’s finance manager who should have experience dealing with customers like yourself on occasion and would likely be able to help guide you through the process successfully.
If all else fails, there are lenders out there that are specifically geared toward helping people with bad credit get the financing they need. Continue to budget by paycheck and pay down all of your debt along with raising your credit score up.