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A car is a dream investment for many youngsters. But it is not easy to get a car loan with a poor credit score. In this blog, we’ll discover how you can get a car loan with a poor credit score.
A car is a millennial’s dream and an item of convenience. You go to work, drop your kids at school, go shopping, or go on road trips – having a personal car makes life much more accessible and saves commute time. However, a car loan with a poor credit score (less than 660) may seem a far-fetched dream.
Before you go about deciding your future car and how much to spend on it, you need to figure out how you get a car loan with a poor credit score.
The good news is that many car dealers are more than willing to work with buyers with a bad credit score.
And if you can pay your installments on time, it can improve your credit score also.
Things You Should Do Before Applying for a Car Loan
Before you go ahead and get a car loan with a poor credit score and purchase a car for exorbitantly high interest, there are a few steps you should take to make the right decision.
1) Find out your Credit Score
First and foremost, find out how severely poor is your credit score. If it is below 650, you may find it hard to get the car of your choice, or it may take some time until you can get it. But there might be some hope if it is between 750-650.
There are many portals available that send you free credit reports. Alternatively, you can visit your credit card company’s or bank’s web portal and subscribe to free credit reports. Check it periodically to keep a close tab.
2) Save a Substantial Downpayment
If you have a low credit score, it would be wise if you could save at least half of the amount of your chosen car cost.
When your credit score is bad, there is a high chance you may not be able to finance the whole amount.
3) Get a Co-Signer
Getting a co-signer simply means having a guarantor, who will have to pay if in case you are unable to pay the dues for 90+ days.
Yes, it is risky for the co-signer. But it is one of the guaranteed ways to avail of a car loan. It helps you reap the benefits of your co-signer’s good credit score.
4) Proven Financial Stability
Before going car shopping on a car loan with a poor credit score, be informed that the loan provider may run a hard inquiry on your credit report and check your financial stability.
Your total debt outstanding must be less than your earnings to improve your chance of getting an auto loan.
Furthermore, money lenders check employment and residential proof to determine your creditworthiness.
So, be prepared to show address proof and recent pay slips.
5) Know How Much You can Afford
At car dealerships, the salesperson will try to upsell you to earn a commission. But you may have existing debt that you pay every month.
So, you have to be very sure in your mind which car you’d purchase based on how much you can afford.
That’s not all. Beyond the car loan instalments, you’d also have to pay fuel, car insurance, road taxes, servicing, registration fees, etc.
Therefore, calculate before buying the car.
6) Know the Eligibility Criteria
To avail of a car loan, you should be aware of the eligibility criteria. Although it defers from one lender to another, in general they are as follows:
- Applicants should be minimum of 21 years and a maximum of 65 years old.
- The applicant’s minimum annual income should be Rs.2 lakh and above.
- If the applicant is self-employed, they must be working in the same field for at least one year.
- Salaried applicants should have a minimum of 2 years of work experience.
7) Check If You Can Payback Early
Many money lenders do not allow borrowers to pay back early. So, read the loan terms and conditions carefully about early repayment.
If it is permitted, pay back early and save your hard-earned money from paying interest. But make sure that doing so wouldn’t affect your credit score in any way.
How to Get Car Loan?
Once you are all equipped and well-informed about getting the loan, there are three ways you can do it:
- Apply online: Search online for financial institutions or banks that offer car loans to people with bad credit history. Go to their website, and read through all the terms and conditions and reviews before applying. However, chances are you may have to pay a higher amount of interest.
- Reach out to your existing bank: If you already have a bank account, walk into your branch. Generally, the home branch of your bank would be more eager to sell you a loan. So, there are high chances for you to get a pre-approved loan (with a soft credit inquiry). They can speed up the process since you are an existing customer of the bank.
- Get one at the car dealership: Most of these car dealerships have tie-ups with numerous banks and loan providers. So, you can directly walk in and contact the representative to get a loan and buy your favorite car altogether. But make sure you read and understand all the fine print before signing.
How Does a Car Loan Impacts Your Credit Score?
Getting a car loan with a poor credit score may temporarily dip your credit score. Since it is a new credit application, the lender has to launch a hard inquiry, reducing the credit score for some time.
New credit accounts for 10% of your credit score. Read our blog to know more about credit scores and how a bad credit score can affect you.
However, if you pay your dues on time, your credit score will improve over time. Therefore, you must practice responsible credit habits to improve your bad credit and fulfill your dream of owning a car.