5 Tips for Financing a New Car with Bad Credit

You can finance a new car with bad credit as long as you have no major installment debt defaults in your recent history. If you very recently experienced bankruptcy or a home foreclosure, you may need to lease a car for a few years as your credit recovers. If your credit is low due to previous missed payments, a short credit history or other flaws, a car loan may be just what you need to start getting your finances back on track. 

#1 Budget First, Apply Second

The first step to making this loan work for you is to set a goal early. Borrowers with bad credit need to be extremely watchful of a loan budget so they can make payments and repair their credit instead of going further into debt. Know your monthly payment goals instead of the overall price you are looking for. Monthly payments will have a bigger impact on your ability to pay than the price of the car will.

#2 Liquidate for a Down Payment

A large down payment can go a long way to making your loan application attractive. If you have savings, consider liquidating some to increase the size of a down payment. Otherwise, save for a few months prior to seeking the loan. Even a difference of $1,000 on a car loan can significantly change the cost of the loan and your ability to find new car financing.

#3 Prepare Income Verification

Even if your credit is poor, you will typically qualify for a car loan if your income is high enough. You will have to pay higher interest rates, but the income alone will be enough to get you a high enough limit to finance your car. As such, you should go into the application process with your income verification already prepared. By doing this, you will give the lender no reason to question you. Use a tax schedule or statement from your employer to provide verification.

#4 Seek Dealer Loans First

Dealers have an added incentive to source your loan: they will profit if you buy the car. As such, dealer loans are good options for high risk borrowers because they have traditionally lower interest rates to begin with. You may have to accept worse terms in the loan in order to get the funding you need at a decent rate. However, if you are willing to take high monthly payments and high fees, you will have a better chance with a dealer than you will with a bank.

#5 Look for Alternative Options

When other options fail, there are alternative lenders willing to fund high risk borrowers who have an income. You can locate these lenders through used car dealers, who have the most experience with them. Ask a used car dealer to give you a quote on any car you are considering trading in, and then ask about an independent financier the dealer would recommend. This will give you an insider's opinion on two things that will greatly impact the quality of your loan.