Applying for an auto loan with bad credit requires extra care and vigilance. Lack of preparation and knowledge can lead you to wrong decisions which can make your credit worse. We hope this guide will help you make informed decisions as you search for the best bad credit auto loan.
1) Your car payments should not exceed 20% of your monthly net income.
Regardless of the credit type, every car buyer must first determine their car budget before applying for an auto loan. The amount you can afford to pay per month is your monthly net income minus your personal expenses. It should be able to suffice not just the auto loan payments but also fuel costs, maintenance and repair costs, auto insurance premium, warranty, and other expenses involved in owning a vehicle.
Experts say that using more than 20% of your monthly net income for your car is not healthy spending. You may need to opt for a cheaper car or save more money for a bigger down payment to avoid spending beyond 20%.
2) Know exactly where you stand in your credit.
Before applying for an auto loan, get a copy of your credit report and purchase your credit score. Your credit report and credit score can show you where you stand in your credit. It’s important to know because you want to estimate how much interest rate you’ll most likely get.
You can get a free copy of your credit report through AnnualCreditReport.com. Though many online sources offer free credit scores, get the one sold by FICO. Experts say your FICO score gives you a more precise idea of the interest rate you can get. Remember, a credit score of 620 or below indicates bad credit while a score of 720 or above means good credit.
3) The shorter the term length, the better.
Most people with bad credit believe that extending the repayment period of an auto loan will save them more money. Unfortunately, it isn’t exactly true. The shorter the term, the better. More money is involved in longer loan terms as you pay more interest. You can use an auto loan calculator to compare auto loan lengths.
4) Bad-credit borrowers are more vulnerable to scams.
Watch out for auto loan scams! Unscrupulous, fraudulent and abusive lenders target people with bad credit. Their goal often is to get more money from you by luring you to pay more for your auto loan using attractive and deceiving offers.
Read about the red flags of auto loan scams and learn how to avoid them. For complaints and more information about auto scams, you can drop by the Attorney General’s office at West Washington Street or call their hotlines in the Consumer Information and Complaints department.
5) Be patient and diligent about research.
One way to avoid scams and find the best bad credit auto loan rate is to do some research. Read and learn about bad credit financing, credit repair how-tos, prospective car models, and the like. Remember that lack of knowledge can make your experience with bad credit financing horrible and your credit worse. Knowledge also helps you make informed decisions and keeps you from being a victim of any scam in the auto lending market.