Money Matters » How to Buy a Car with Bad Credit and No Money Down

How to Buy a Car with Bad Credit and No Money Down

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Buying a car with poor credit and no down payment may sound like an impossibility, but there are several things you can do to make the process a little less painful. For example, you may consider buying online. These businesses have less overhead because they do not have to pay rent at a physical location. Or, consider a co-signer, one with a better credit rating than you have. A third option is to purchase your car from a “buy here, pay here” car dealer.

How can you buy a car if you have bad credit and no money down? Pre-qualify by finding a lender that specializes in subprime loans for those with a credit score of 501-600. Utilize your income-to-debt ratio, and use the vehicle as collateral for the loan. Choose a car within your means.

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Can You Buy a Car with Bad Credit and No Money Down?

Most of us need a car. To get back and forth to work, run errands, or shuttle the kids around. But when you have poor credit, bad credit, or no credit, it can be tough to buy a good car with payments you can afford. Interest rates are likely to be higher, and your choices may be limited. Don’t despair. You can still buy a vehicle with no down payment and a low credit score.

1 The first step is to determine what type of car you need and can afford. Do you drive a lot of miles each week? You will want to look at smaller, more gas-efficient models. Do you haul a lot of cargo, like groceries or sports equipment? Then you will probably look for a sport utility vehicle. If you have a big family, you will want a large sedan or station wagon.

2 Next, you should go over your budget: income, and expenses and figure out how much you can afford to spend on a car. Don’t forget to factor in costs such as gas, maintenance, and insurance. Other fees may include registration and tags.

3 Shop around! Check out local dealers and car lots as well as online. Online options could save you money since they have lower operating costs than bid dealerships.

Buyers with poor credit will probably opt for a used car, especially if they have no down payment. Remember that your interest rates will be much different than those advertised. You may also be committing to a 72-month loan. That’s six years! Be sure that you want to dedicate that long to pay for a vehicle.

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Research Dealerships that Offer Financing for Buyers with Poor Credit

Many online dealerships offer auto loans for those with bad credit. Do your homework before deciding on a car to purchase. Apply to multiple online outlets to get your best offer. Many online dealers specialize in low credit scores and can provide a more comprehensive selection of vehicles.

If possible, try to improve your credit score before you start shopping. Can you pay off a few small debts or credit card balances? Are you current on your rent and utilities? Failure to repay personal loans can negatively impact your FICO score, which will result in higher interest rates when you do buy a car.

Do you have a down payment? That will go a long way towards securing a loan with payments that won’t break the bank. Instead of money down, how about a trade-in? You will generally receive less value on a trade-in than if you were to sell it outright. Use the proceeds to offer a down payment. You can find out the value of your current car online, so you will know what to expect when an offer comes your way.

You may be required to secure a cosigner to accomplish the purchase of a vehicle. Ask family and friends if they would be willing to cosign for you. Keep in mind that there is a risk to anyone who agrees to cosign for you. Should you default on the loan, they will be on the hook to pay for your debt.

Get Pre-approved for a Car Loan Before Going to a Dealership

Fill out applications, in person or online, to get a jump on the paperwork. This can also give you an idea of how much you can comfortably afford for your new or used car. Consider your current obligations and be sure not to overextend yourself.

Banks, credit unions, and online lenders will review your credit report, not just your credit score to determine your creditworthiness. All of these will impact the amount of your loan, interest rates, and payment options.

You can avoid bad surprises and disappointment at the dealership by having a pre-approved loan. You will also increase your ability to negotiate a better price once you have chosen a vehicle. Keep in mind that the lender will consider the “Loan-to-Value” ratio, also known as the LTV.

This is the amount they are willing to finance based on the value of the car and the total of the loan. Since cars depreciate over the years, as much as 20% for a new car in the first year alone, lenders may be unwilling to finance a vehicle that is too old or has less resale value than the amount of the loan. That is certainly a situation you will want to avoid: owing more than your car is worth.

Also, keep in mind that you do not have to spend the full amount of the pre-approved loan. First of all, there will also be tax, title, and registration that must be taken into consideration.

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Don’t Be Afraid to Negotiate

With pre-approval in hand, you will put yourself in the driver’s seat. Make an offer. The worst that can happen is the dealer says no. Once you have secured your financing, you are in a better position to bargain. If they won’t budge on the price, see if they will give you a better interest rate.

Having a preapproved loan means that you are essentially a cash buyer, giving you even more leverage to make a good deal even better. You are better able to understand your interest rate and can be prepared if the dealer should start to add “points”. These points, even one or two, can translate into hundreds of dollars over the life of the loan. Pre Approval will also help you to resist add-ons that you aren’t interested in, like extended warranties.

Remember that applying for an auto loan does impact your credit score, so apply for all of them within 14 days. This will cause the applications to be counted as just one inquiry with minimal negative impact. Also, pre-qualifying is different from pre-approving.

When you pre-qualify for a loan, your credit score isn’t affected. It is just a brief snapshot of your situation, based only on a few details, such as income and finances. A pre-approved loan will require more in-depth information but will be more specific as to what you can afford and how much it will cost.

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Bad Credit and No Down Payment?

Purchasing a new or used car can be a stressful experience. With a great credit score, you can expect to get a low-interest rate, even with no down payment. Conversely, if your credit rating isn’t the best, you can still hope to get a good deal with a healthy down payment. But when you have the double whammy of bad credit and no money down, the search can be a lot more challenging.

The best thing to do in that case is to do lots of research. Look into multiple avenues before you make a decision. Shop around, look online, and visit many dealerships. One solution is to look into “buy here, pay here” car lots. These businesses specialize in poor credit and high-risk buyers. The reason is that the car itself is your collateral. In short, if you fail to make the payments as promised, they simply repossess your vehicle.

You would, of course, avoid that outcome at all costs. When you are trying to repair your credit score, you will want to make your payments faithfully and on time. Do your best to live up to your agreement. In time, your credit score will improve, and you will have much more leverage on your next purchase, be it a vehicle or a home.

Choose a Reputable Lender

Don’t make the mistake of throwing good money after bad. When you are already in the precarious position of needing a car, not having enough money to put a down payment on one, and having a poor credit score, the last thing you need is to purchase a lemon.

Seek a reputable lender. Banks, credit unions, and large dealerships are the places to start. Online sellers will have reviews that you may consider before committing to a vehicle that you could end up regretting. Use extreme caution when replying to online ads from private parties. It is dangerous for so many reasons. You have no assurance that the vehicle is represented honestly and little recourse if the deal goes south. Beware of friends and family, as awful as it sounds, because sentiment can get in the way of common sense.

Remember that if it sounds too good to be true, it probably isn’t. Trust your instincts, and take your time. Look at lots of cars (or trucks) before you make a decision. Your situation will improve if you take your time and make an informed decision.

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