People with poor credit have a difficult time getting approved for car loans; however, certain life circumstances may make it essential to purchase reliable transportation. Often, people with poor credit are already in dire financial situations and don’t have the money to purchase a car without a loan. Depending on their credit score, they will likely get a poor financing deal.
According to Fox Business, most interest rates for car loans average between 6 to 7 percent; however, people with poor credit may pay between to 14 to 25 percent interest rates on a car loan according to The Economist. The good news is that lending options are available for people with poor credit, and these individuals can take certain steps to lower their borrowing costs. Read on to find out more about what to expect when purchasing a vehicle with poor credit.
Know the Market
There are many financing options for people who want to obtain a car loan. Those who belong to a credit union should check loan rates at their financial institution. They should also consider loan rates from banks and car dealers. Shopping around for a loan will ensure consumers get the best possible rate. People who can’t purchase a car via these traditional loans may need to consider alternative methods such as buy-here and pay-here dealerships. Typically, these type of loans require a down payment of at least $1,000, and customers are required to make weekly or biweekly payments. Borrowing costs are higher for these loans, and borrowers who are even mildly late may have their vehicle repossessed. Because of high borrowing costs and poor conditions, these subprime loans should be used as a last resort.
Only about one in ten people who apply for traditional car loans from banks, credit unions or vehicle financing companies with a credit score below 620 are approved according to CNW Research. People with poor credit often have to borrow subprime auto loans. Prior to applying for a loan, people should check their credit report, and be sure to make timely payments for at least six months prior to applying for a car loan. Additionally, people should save as much a they can for a down payment to reduce their borrowing costs and because it’s often easier to get approved for a smaller loan. Most people should save about 20 percent of a car’s cost for a down payment; however, those with seriously low credit scores may be required to make a down payment that is 40 to 50 percent the cost of a vehicle. Because smaller loans are easier to obtain, buying a used rather than new car may increase the chances of approval. Finally, a cosigner can lower borrowing costs and improve the chances of approval for a loan.
People should expect the following interest rates for car loans based on their credit scores, according to The Huffington Post:
- Credit scores of 740 or higher: 3.2 percent for new cars, and 4.4 percent for used cars.
- Credit scores between 680 to 739: 4.5 percent for new cars, and 6.4 percent for used cars.
- Credit scores between 620 to 679: 6.5 percent for new cars, and 9.5 percent for used cars.
- Credit scores between 550 and 619: 9.9 percent for new cars, and 14.4 percent for used cars.
- Credit scores 549 or lower: 12.8 percent for new cars, and 17.9 percent for used cars.
People whose credit improves after they receive a car loan should consider refinancing their loan. Even lowering interest rates on a car loan by a percentage point can save hundreds of dollars. In addition, people who can’t find a viable loan may want to consider waiting. Many rental car companies offer competitive rates for renting a car for several months, and this may be a viable option while your finances improve.