Mary is the single mother of three young children who often struggles with everyday financial challenges, and at times wonders how she will put the next meal on the table. This wasn’t always the case though. Her marriage seemed to be a happy one: the house, the kids, the minivan, two dogs, all living in their happy little suburban world. It was the picture perfect definition of today’s successful, middle-class family.
After 14 years of marriage, Mary thought she knew her husband well. But it turned out that her husband had a secret that would turn this happy little home upside down in an instant. He had a gambling problem that had spiraled so completely out of control, that within a matter of months their bank accounts had been wiped out, their credit cards pushed to the limits, and their car was repossessed. By the time Mary learned of her husband’s gambling problem, it was already too late, and once their home was foreclosed on, their marriage also ended.
After her divorce, Mary decided to start a new life for her and her children in Los Angeles. The big city atmosphere offered many opportunities for work, and seemed like the perfect place to start over. She found a job as a waitress a few miles away from her new apartment, but because of all the financial damage that was caused in her marriage, Mary didn’t qualify for an auto loan to be able to buy a car. She wasn’t crazy about the idea of taking the bus to and from work, but at the time relying on public transportation was her only option.
Mary knew that her credit score had plummeted as a result of her husband’s gambling problem, and even though she was doing her best to rebuild that credit, the simple fact was that it would probably take years to repair the damage caused in just a few short months. Struggling as a single mother of three in a new city was a difficult life, and Mary just couldn’t seem to find a way to afford a car to make her life just a little easier.
In many locations, a car is a necessity. But if you have bad credit, getting a car loan can be tough. If you’re willing to shop around and practice a bit of financial discipline, you may be able to find yourself behind the wheel of a decent car sooner than you think.
Maybe Your Credit Isn’t So Bad
Don’t judge your credit-worthiness for a car loan based on whether or not you can qualify for a mortgage. Cars are usually less expensive than houses, with shorter loan terms. Cars are also easier than houses to repossess if borrowers default. As a result, the same credit score that might make you a sub-prime mortgage borrower may place you as a prime or near-prime candidate for a car note. Check your credit score before you start kicking tires and going for test drives.
Make a Larger Down Payment
If you need a car right now, this strategy might not be practical, but if you can wait a few months, you can start saving now toward a future larger down payment for a car. The more you pay up-front for your new or new-to-you car, the less you will have to finance for a loan and the better chance you’ll be approved for a loan at a decent rate. A smaller loan also frequently means shorter repayment terms and a lower interest rate.
For Mary, taking the bus may be her only option right now, but if she manages to save up some of her tips from the restaurant and put them aside for a bigger down payment on a car, she may be able to afford one by next summer. That still seems like a long ways away for her and her three kids though.
Aim for a Shorter Loan Period
Smaller monthly payments may be easier to swallow, but you also run the risk of paying for a car long after its best years are behind it. A three-year repayment car note typically carries a smaller interest rate than a five-year repayment plan. You will also save money over the entire life of the car with a shorter repayment loan term.
However, make sure your payment falls within a realistic budget and be sure to budget for insurance as well. You do not want to be in a situation where you’re working paycheck to paycheck just to pay for the car that is getting you to work.
If you’re looking at a sub-prime auto loan, the buying process is different from the standard buying process. The bank looks at your income and your debts and budgets you for a monthly payment. So you may not have much say in regards to what your loan term is. But if you have options and can comfortably afford the larger payment, you’ll save a lot of money in the long run.
Offer Your Present Car as Collateral
Many people trade in their cars to get a better price on a new car. But if you need or want to keep your present vehicle – for instance, for your spouse or a child – you may be able to obtain favorable financial terms by offering your present car as collateral for a new car loan. But use caution with this tactic – if you fall behind on your payments, you run the risk of losing both cars.
Check with Your Bank or Credit Union
Do you have a long-standing, good relationship with your bank or credit union? If so, that’s a good place to start when looking for a car loan. Credit unions are often more flexible about credit scores than conventional banks. You may also qualify for discounts if you bundle your car loan with other products they offer, such as a checking or savings account.
A “Second Chance” Auto Loan
If your credit problems are mostly in the past, you may qualify for a “second chance” auto loan program. Such programs generally require borrowers to demonstrate a steady income, no active or recently closed bankruptcies and maintain current payment status for their bills. These programs can have reasonable interest rates and repayment terms, and maintaining a good payment record can be a favorable mark on your credit report.
Second chance loans, also known as bad credit auto loans or sub-prime loans, can be separated into two categories – dealer financed loans and bank financed loans.
Dealer Financed Loans – For these loans, payments are made directly to the car dealership itself. The typical kind of car you will find for sale at these “buy here pay here” lots, is one that is most likely older and has much higher mileage on it. If you hear the term “guaranteed financing,” it’s probably a dealer financed loan.
Some of these operations are known for preying on buyers with bad credit by advertising car loans without a credit check, or guaranteeing approval regardless of your credit rating. The dealer can “guarantee” financing because they will simply make the down payment unrealistically high in relation to the value of the car. Additionally, the cars at such lots are often second rate and may even be repossessed from a previous buyer.
You should also be aware of the fact that these “guaranteed auto financing” dealers rarely report your payment history to the credit bureaus. This is a major issue that you should consider closely, because an auto installment loan in good standing can do wonders for your credit history, and will also help you avoid this situation in the future.
Bank Financed Sub-prime Loans – These loans are also usually handled through the dealer, but a third party – the bank – is also involved. This is called indirect lending. While you buy the car through a dealer, you make your payments to the bank.
Since these banks realize that you are more apt to make payments on a reliable vehicle, cars sold under this type of program are generally newer, lower mileage used cars. Many of these banks will even finance new cars. This means you could be steered into a vehicle that might be more than you should be budgeting. Be careful!
A Personal Loan
If you strike out at your credit union and can’t get approved for a second chance secured auto loan, you still might be able to address your transportation needs through a personal loan, also known as an installment loan. These types of loans work like an auto installment loan where you make regular payments, usually monthly.
The big difference with a personal loan is that they are not “secured” by any property. That means if you default on your loan, they can’t seize your car like they would with a normal auto loan. However, this also means that interest rates will be considerably higher than an auto loan.
LoanNow offers personal loans and bases its credit decisions on your overall credit profile, not just your present credit score. If you’re approved, you can apply your loan toward the purchase of a car.
If Mary had applied for a loan with LoanNow, she may have been approved for the money she needed to get a vehicle of her own. Even though she missed a few payments on her credit cards and her credit score suffered because of it, she had an overall fairly good credit track record. LoanNow would have looked at the whole picture rather than just her three digit credit score when making the decision of whether or not to approve her for a loan.
If you have bad credit, finding a good option for a car loan can be a difficult task to accomplish. LoanNow offers a real solution that will help you get the money you need. As you make timely payments, you’ll build your LoanNow credit score and could unlock better rates in the future.
Watch Out for Unnecessary Extras
Some unscrupulous lenders take advantage of borrowers with less-than-perfect credit by sticking them with contracts stuffed with extra features that the buyers didn’t ask for. In many cases buyers are not even aware of all the extras that are stuffed into their car notes. Look out for items like after-market services and extended warranties.
Beware of Yo-Yo Financing
Do not, under any circumstances, drive off the lot in “your” new car until you have a signed, final contract. Otherwise, you may find yourself on the receiving end of a phone call or other communication with the dealer, “explaining” that the terms of your car note have changed in some fundamental yet exorbitant way. You may be stuck paying an additional down payment or larger monthly payments than what you thought you drove off with.
Remember to be realistic in your expectations. You are not looking for your dream car. Wait until your credit is repaired for that one. For the time being, look for good, reliable, transportation. Pick a car that has the lowest monthly payment possible for the shortest term. The shorter the term, the less time you will spend in negative equity land, and the sooner you will be able to either re-finance or get into a loan with a lower interest rate