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Tips on How to Get a Car Loan with Bad Credit

Car Loan

If you have bad credit, it can be difficult to get a car loan. Lenders are often hesitant to approve loans for people with poor credit scores, as they believe that these borrowers are more likely to default on their loans. However, this doesn't mean that it's impossible to get a car loan with bad credit. You can get the loan, but you will pay more than the person with a good credit rating. There are several steps you can take to improve your chances of being approved for a loan. In this blog post, we will discuss tips on how to get a car loan with bad.

Know your credit score and report

Even if you have bad credit, you are still entitled to a free credit score. Knowing your score will tell you what kind of deal you'll get on your loan. According to nerdwallet, a FICO credit score is the gold standard and is based on various measures of your credit history. They also have a system that calculates your risk score. As a result, the higher your score is, the better deals you will get. After you have the details of your credit score, find ways to improve the information that lenders will use to decide where you fall. You can check if there are errors made in the report like accounts indicating past due payments, but you paid them on time. Are there low balances you can pay out? You can also look for delinquent accounts that can be brought to current.

Show them you can afford to pay the loan back

Besides the credit score, lenders will also look at your income and debts to decide if you're a good candidate for the loan. To improve your chances of being approved, it's important to show the lender that you have a steady income and low debts. Back up your response by documenting the following;

  • Source of income- Proof of employment in form of pay stubs, offer letters, or tax returns. For borrowers with bad credit, lenders are interested in a steady income like employment. Although others will consider other sources like alimony, disability, or Social Security payments.
  • Debt-to-income ratio- To be on the safer side, this ratio should be below 50%. This means that your monthly car payment should not be more than 50% of your monthly income. You can calculate this by adding up all of your monthly debts (including your car payment) and dividing it by your gross monthly income.
  • Credit use- Another factor lenders will consider is how much of your available credit you're using. This is also known as your credit utilization ratio. Most lenders want to see a borrower spending less than 30% of their available credit. In case the credit usage is high, but you paid balances recently, present the lenders with proof.
  • Payment history- Lenders will also look at your payment history to get an idea of how likely you are to repay your loan. They will look at factors such as whether you've made your payments on time, and how many times you've been late. If you have at times been late to pay any loans, have a reasonable explanation and let them know the issue not going to happen again.
  • Payment-to-income ratio- To know whether you can afford the loan you are requesting plus the insurance, lenders will calculate your payment-to-income ratio. This is the ratio of the loan plus insurance to the total monthly income and needs to be less than 20%.
  • Reduce the loan amount you need to borrow
  • Lenders will think about the risk of loss in case you can't make the payments and will offer you a loan based on that. If you ask for a high amount, the risk of loss to lenders increases. This may make them not approve the loan. When you borrow less you can increase the chance of your loan being approved. To reduce this risk, try to;
  • Make a down payment as high as possible and finance the rest. This shows the lenders you are committed to paying them back.
  • Trade-in an old car to lower the amount you need to finance.
  • Look for a less expensive car with the features you want.

Compare lenders

Many types of lenders offer bad credit loans such as banks, online lenders, and credit unions. They all have different terms and conditions. With bad credit, some lenders may take advantage of you because they know you are desperate to get a car. According to credit karma, it is important to compare different lenders to get the best deal for you. There are a few things you should consider when comparing lenders such as:

  • The interest rate you'll be charged
  • The size of your down payment
  • The length of the loan term
  • Any origination fees or prepayment penalties
  • The annual percentage rate (APR)
  • Whether the loan is secured or unsecured

As much as you may be in a hurry to get a car, take time to understand the loan details to avoid any confusion that may cost you later. Do the following;

Go for loan terms, not monthly payment

You must decide on a loan length and not the monthly payment. This way, you will not be in a difficult situation when trying to make payments every month. According to Bankrate, monthly payments may be attractive but, you end up paying more interest if you are not careful.

Confirm the terms are final

Before signing the papers and taking out a car loan, make sure to read everything, including the last pages. If you do not agree with anything that is written there, you can change it before signing and that would be much better than just wasting your money. If you have been funded by a dealer, they may take advantage of customers who fail to complete their paperwork.

Do not pay early payoff fees

To protect yourself, do not let your lender ask for an early payoff fee. These fees depend on your rate of interest and they are usually very high. This can be up to 100% of the total amount of money that you will have paid during the life of your loan. If you are ever in this situation and trying to find a way to overcome it, do not hesitate to ask your lender for help. It is important to be aware that you may have the option of paying these fees.


Bad credit and car loans are difficult and frustrating to deal with. By following the tips in this article, you will get the best loan possible for your situation. If you have bad credit, you can get a car loan as soon as possible.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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