4 Quick Steps to Buying a Car with Bad Credit

4 Quick Steps to Buying a Car with Bad Credit
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Brittney Mayer
By: Brittney Mayer
Posted: July 12, 2018
BadCredit.org's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Between trudging from lot to lot, fending off overeager salespeople, and spending hours haggling for a deal, buying a car isn’t a particularly fun process at the best of times.

For consumers with bad credit, the fun level often drops even more while the stress level tends to rise. The focus can quickly become on simply getting approved for a loan, rather than on finding the right car.

As with most things in life, however, buying a car with bad credit can be a smoother, less-stressful process if you start with a plan. We’ve put together four quick steps to help you get back on the road.

1. Find a Dealer with Flexible Credit Requirements

When you have bad credit, the most difficult part of buying a car — assuming you need to finance it — will be finding a lender. Bad credit is a red flag to most lenders, as it indicates a high level of potential risk.

Dealers that offer in-house financing often tend to have the most flexible credit requirements, usually because they have a vested interest in selling the vehicle, not just financing it.

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A key thing to understand about online dealer networks is that the network platform itself has no part in the loan process. The network simply connects you with the partners that best match your qualifications.

Once you select a dealer partner, you’ll be put in contact with a dealer representative. The online network has no further role in the process. Instead, you’ll meet with your chosen dealer to select a vehicle and complete the loan process.

While you’ll generally need to have a specific vehicle in mind before you can apply for a typical direct auto loan, using dealer financing means you’ll choose the specific dealer first. You’ll then select a vehicle from the dealer’s stock that fits your needs (and your budget).

2. Select a Car Within Your Budget

Another important step in buying a car with bad credit is to determine a realistic purchase budget — and stick to it. Taking on an auto loan with a monthly payment outside your budget is a surefire way to set yourself up to fall behind and cause more credit damage.

When crunching the numbers, be sure to include all of the variables in your calculations. The sticker price of the vehicle isn’t the only cost factor; the loan will charge interest fees, and most car purchases will also include sales tax, as well as title and registration fees.

The size of your monthly payment will depend on the total size of the loan, the interest rate it charges, and the duration of the loan term. Longer loans will typically mean lower monthly payments, but will have a higher overall cost due to the additional interest charges, as shown in the graph below.

Graph of Auto Loan Monthly Payment & Total Interest By Term Length

If math isn’t your strong suit, there are a variety of plug-and-play auto loan calculators available online. They can help you determine the maximum purchase price that works for your budget by letting you vary the loan amount and terms for the best fit. The best calculators will also allow you to include additional charges, like registration fees and sales tax, to give you a complete picture.

3. Make a Down Payment or Bring a Trade-In Vehicle

Not only is setting a car-buying budget important to avoid taking on unmanageable debt — debt that will likely cause more credit damage — but the amount you intend to borrow is also a big factor in whether you’ll be approved for the loan.

Asking for a loan that the lender feels would be outside of your means for repayment can cause you to be rejected for the loan. In these cases, simply reducing the amount you are asking for can sometimes improve your chances of approval.

If you don’t want to reduce your overall budget for a vehicle, but can’t qualify for a loan large enough to cover the purchase price, then you’ll need to make a cash down payment or trade in another vehicle to make up the difference.

Depending on your situation, it may be better to make a down payment than to trade in an older vehicle. While trading in a vehicle is often easier than putting together a down payment, the value you’ll receive for a trade-in is rarely as high as you could potentially receive from selling the vehicle outright.

4. Pay Your Auto Loan On Time Every Month

Once you’ve found a dealer, chosen a vehicle, and signed your loan agreement, you’ll be able to drive off the lot with your new car. But don’t think that the loan process ends here.

If anything, what you do after you obtain an auto loan is just as, if not more, important than the steps leading to it in the first place. That’s because, when handled responsibly, your new auto loan can be a powerful tool for rebuilding your bad credit.

And it all starts with ensuring you make your payments in full and on time every month. Your payment history accounts for more than a third of your FICO credit score calculations, making it the single largest factor in your credit rating.

FICO Score Factors

As a result, even a single delinquent payment can have a devastating impact on your overall credit profile. But don’t panic if you’re a day or two late; payments must be at least 30 days past due before they’re reported to the bureaus as delinquent.

A simple way to ensure you’re always on time is to set up automatic payments through your bank account. You can choose the payment date — ideally at least several days before the due date — and the money will automatically transfer each month. (Just make sure you always have the funds in your account to avoid overdraft fees.)

The Right Steps Can Get You Back On the Road

While the ability to digitally browse through online auto sites has taken some of the legwork out of finding a new car, the process is still usually about as much fun as a dental visit — especially when you have bad credit.

With proper planning, however, you can at least make it a quicker experience, if not a more enjoyable one. Following the right steps can not only get you back on the road, but it may help you rebuild your credit score, too.