When trying to figure out where to get a car loan, the option that you choose will depend quite a bit on whether you have good credit of bad credit. Obviously, those with good credit will find the process easier and cheaper. Having said that, you have options, even if your credit score has seen better days.
Car Loans For Good Credit
Let’s start with good to excellent credit. If you have a credit score over 670, you have a good credit score. Those of you with scores over 740 are considered very good and anything over 800 is considered excellent.
Community Credit Unions
With good to excellent credit, a local credit union should be your first stop. Being a not for profit company, a CCU will almost always provide you with the best rate. The only time that you should not go to one would be if you have excellent credit and a car manufacturer is offering a zero percent interest deal.
Your next best bet is a national bank such as Chase or Capital One. If you do not have very good to excellent credit, these organizations may be just as competitive as a CCU. They are also much more likely to have an extensive infrastructure that will make them easier to work with both before and after you make your purchase.
Dealer Finance Departments
Last on your list should be financing at the dealer. If you have excellent credit and can qualify for a zero percent interest deal, great. That would be your best option because no bank can match a zero percent rate.
If your credit is not perfect, the dealer is likely to try to add some padding to that interest rate of any loan offer they present to you. If you go the dealer route, be prepared to negotiate and you may need to look into refinancing after the deal is done.
Car Loans For Bad Credit
But what if you have fair to bad credit, are there options? A score under 670 would be considered fair and anything below 600 would be considered a bad score, but yes, you have options.
Online Loan Websites
One of the easiest ways to finance a vehicle with bad credit is through a personal loan that you get online. These online loans will generally be easier to qualify for and most will be unsecured, paying you directly. The interest rates and fees will be higher on these loans, but since they pay you in cash, you can offset much of this cost by buying a used vehicle direct from a seller.
The average car will be 1000 to 2000 dollars cheaper when you skip the dealer and make a purchase directly from the original owner. This money can go a long way towards paying down the extra costs involved.
If the online loan does not work out, another option is to visit a small alternative dealer. Commonly referred to as “buy here pay here” dealers, if you have bad credit, you can almost always get approved at one of these places. The catch and there definitely is a catch, is that it will be expensive. You will pay both an inflated price for the purchase of the vehicle as well as the finance charges. Use this only as an option of last resort.
Improving Your Car Credit
So, what do you do if you can not qualify for a car loan or the terms are too harsh that you can not afford to accept it? You work on your credit. Here are a few things that can help get you a loan approval with reasonable terms.
Decrease Revolving Debt
Decreasing your revolving credit card debt is one of the fastest ways to increase your credit score. This factor makes up a full 30 percent of your score and it is updated every thirty days, so results will come fast.
Ideally, you want to have under 30 percent credit card utilization and under 10 percent is even better. That means that if you have 3000 dollars in available credit, you should be carrying no more than 900 dollars in debt.
If you can not get down to that level, do your best. This is not an all or nothing credit factor. The results are incremental, meaning that if you lower your utilization from 70 percent to 60 percent, you will still see a score increase.
Increase Your Income
Who wouldn’t want to make more money right? Aside from looking for a new job or demanding a raise from the boss, there are a few great ways to increase your income as far as car credit goes. Increasing your income will decrease your debt to income ration and may make you a much better candidate for a loan.
One way to increase your income is to get a part time job. Every lender is different, but many will consider your part time job as income if you have been working it consistently for at least six months.
Another option is to simply consider all of your sources of income. Are you including all of your revenue streams in your monthly or annual income total. This could be anything from child support to a structured settlement. If you get money consistently from a source, you may be able to count it.
Bump Your Down Payment
One final option is to increase your down payment.
The more money that you put down, the less risky your vehicle loan is. This is, in large part, due to how a vehicle depreciates. If you are buying your vehicle from a dealer lot, it will likely depreciate 20 percent as you drive it away. That means that if you put down any less than 20 percent, you will be upside down on the loan immediately.
From a lender perspective, this is a very risky thing. If you were to default early on in the loan, they would stand to lose thousands of dollars simply in vehicle depreciation, and on top of that there would be admin fees and repossession
In general, the more that you can put down, the better. Getting approved will be easier and the terms that you receive will be much more favorable.