Individuals with bad credit can find it challenging to secure certain types of loans, as their credit report would have to be evaluated by lenders. Even when they get such loans, they may be required to pay more in interest rate. It also applies when securing an auto loan. With bad credit, getting best loan deals may be far-fetched and when you do, expect high-interest rates from the banks.
Based on the report generated by Business Insider, individuals with good credit scores ranging from 661 to 780 have access to interest rates that are 3% lower than those with credit scores between 601 and 660. For you to have access to lower interest rates, you would have to improve your credit. This would require you seeking the help of a credit repair company. In most cases, it takes time for your credit to be improved.
However, you can acquire an auto loan with bad credit using the steps discussed in this article.
1. Save A Significant Amount Of Money As Down Payment
One of the first step to take when acquiring a loan with a not-too-perfect credit is to save a down payment. It is generally recommended that you save at least 20% down payment for the vehicle you intend to purchase. The larger down payment you have, the easier it is to have your loan approved.
The essence of making such down payments is to reduce the outstanding amount you would have to pay for the vehicle. This term is called the loan-to-value ratio. By having a large down payment, your car purchase will be considered less risky by banks.
2. Improve Your Credit If Possible
An individual’s credit score is likened to a student’s GPA. This is a three-digit score that ranges from 300 to 850. Your credit score focuses on your borrowing rate, credit application history, and payment history. Prior to applying for a loan, it is important that you review your credit score to know your current status.
It is important to have an idea of your score before shopping for loans. Several lenders have various minimum credit score requirements which must be met before they can approve an auto loan. According to FICO, one’s credit score falls between any of these five categories:
Very Poor – from 300 to 579
Fair – from 580 to 669
Good – from 670 to 739
Very good – from 740 to 799
Excellent – above 800
If your purchase is not urgent, you can keep it aside while you build your credit. For a start, check your credit report for errors and ensure all your debts are paid off from your credit cards and loans.
3. Determine The Amount That Should Be Spent Each Month For Your Car Payment
It is ideal to have a manageable budget – one you can easily work with. You can start by listing all your recurring expenses in the past months. These expenses include housing cost, debt repayment, and other bills. Having noted these items, set aside an amount you intend to channel into other tasks such as down payments.
Deduct your expenses and savings from your monthly income. This will provide you with the amount you can afford to pay each month. It is important to note that bad credit comes with higher monthly payments due to the interest rate. Ensure that your monthly payments are promptly made, as it boosts your credit score.
If you would like to apply for an auto loan, please visit this link: car loans for bad credit.