Bad Credit Car Loans: An Overview for Borrowers
Life isn’t always easy. Sometimes, we make bad decisions that haunt us for years to come. Sometimes, things just don’t go our way and we end up paying the price through no fault of our own. No matter how you end up with bad credit, a low credit score can really put a damper on how you see your financial freedom. Fortunately, when it comes to getting a loan for a new car with bad credit that is in your price range or auto refinance for existing car from a finance company, bad credit isn’t necessarily a roadblock. If you’re suffering the effects of financial hardship and credit woes, take some time to learn more about what credit is, what your options are for automotive financing, auto refinancing, or car loans for bad credit through a finance Auto Dealer like Drive Thru Finance, and how you can pursue those options right now. If you are looking to buy a car with credit, read on.
Chances are that you already understand some basics about credit and bad credit auto loans. There are multiple independent financial businesses called credit bureaus that collect financial information on every person who obtains credit through loans, credit cards, and other means in Canada. This sounds intimidating and, in truth, it is a bit frightening to think that your every financial move is tracked and aggregated as part of a score. It’s almost like being in school again, but much more personal and with much wider of a reach.
Credit bureaus don’t track everything you do with your money, though, and that’s part of the reason why it’s so easy for people who are otherwise financially healthy and responsible to get into trouble with their credit scores. Things like building a healthy amount of savings and living within your means, don’t count. It’s your credit activity or your financial behavior with credit that makes a difference. This means that, no matter how responsible you are with your money, all it takes is for you to forget to pay a card or max out a card in an emergency situation and your credit score will take a hit.
This is definitely unfair from the consumer point of view, but from the credit bureau’s point of view, it’s not about being fair or unfair. Instead, your credit score is an easy way for banks and other lenders to determine how trustworthy you are with borrowed money. Even so, the fact that credit scores can drop so low so fast and seem to stay that way no matter how hard you try to get ahead is disheartening, to say the least. Your credit score just doesn’t tell the whole story on who you are and whether you’re a trustworthy person or not. It just uses some straightforward math to assess how you use credit.
Is Bad Credit Better Than No Credit?
With that said, there actually can be some benefits to having bad credit from the perspective of some lenders. For one, the age of your credit history is actually part of your credit score. The fact that you have managed to obtain credit in the past shows that you are at least familiar with what credit is and that you have borne the responsibility of credit in the past. Of course, this isn’t as important as other parts of the credit score, including payment history and credit to debt ratio, but from a lender’s perspective, some time spent in the credit system with not-so-stellar results is better than no time at all.
Think about it this way: If you were going to hire someone to fix a clogged sink in your home, would you call a plumber who’s got bad reviews for being rude or let your neighbor who’s never even touched a wrench do the job? It’s not exactly the same for credit, of course, but this is a situation in which bad experience is better than no experience. And now that you understand more about how credit works, you’re likely to want to avoid making your score worse. So, don’t let bad credit get you down. This is simply the starting point from which you can recover and come back stronger than ever. There are lenders who understand this and want to help you move forward.
Your Options for Obtaining Automotive Financing With Bad Credit
So, if you have bad credit, which generally means a credit score of 600 or below with any credit bureau, what are your options for buying a new car? There are two primary options: Get financing through a lender or paying out of pocket. Let’s explore both options so you can understand the pros and cons of both.
Lenders who Specialize in Bad Credit Car Loans
Good news for those who have bad credit and want financing for a car: There are lenders who understand that not everyone who needs a loan has a spotless financial history. This is a relief for many people, but don’t get too excited just yet. There are a lot of predatory and irresponsible lenders out there that prey on the vulnerable position of those with bad credit. Having bad credit can make you feel powerless at times, but you aren’t. You still have the ability to make smart choices. Make use of this power while looking for the right finance options for bad credit auto loans.
As you look for the right finance option, keep an eye out for lenders who make grand claims. Overpromising is a common trap for bad credit car loan shoppers to fall into. Lenders who say they approve everyone no matter what their credit situation often have an ulterior motive. They just want to get folks through the door and borrowing regardless of who those borrowers are and what their circumstances indicate. A lender who focuses on borrowers with bad credit but focuses on reasonable claims is a much better choice.
You’ll also want to make sure you understand the approach your lender takes to financing or if the financing comes through the company you apply with in the first place. Some companies take applications from people with bad credit and send them out to a number of different lenders, often without consulting the borrower before doing so. Others, like Drive Thru Finance, take a close look at who the borrower is and what they need before turning to a specific lending partner to provide financing. This is a better approach not only because it’s more personal but also because it avoids the need to undergo multiple credit inquiries, which we’ll explain below.
You can try to go to a traditional lender such as a bank to get a loan. However, if your credit score is 600 or lower, you might not want to try. To begin with, big banks can be choosy about who they lend to and they tend to reserve their most favorable terms for the most qualified borrowers. This means that only people with a high credit score, usually 800 or above, will get truly good terms from a bank. Even those with scores in the 650–750 range, which is considered good but not fantastic, might get rejected for a car loan if the bank sees any red flags in the applicant’s broader credit history. If your score is in the 300–600 range, they may not even give you the time of day beyond pulling your credit history to assess it, which is actually bad for your credit score in the long run.
Every time a lender looks at your credit history, it reflects on your credit score as a “hard” credit pull. The reason credit bureaus count this as a strike against you is that it’s not responsible to take out too much credit and applying for a lot of different cards and loans over a short period of time is a sign that you might abuse all that credit if it’s extended to you. One hard credit pull every few months isn’t so bad because these temporary score penalties don’t last long, typically expiring within two months. But it does mean that you should gamble smart when you apply for financing, so don’t take a reckless “see what sticks to the wall” approach with loan applications. It’s best to apply once in a situation where you know you’re likely to be approved. When you’ve got bad credit, it usually means sticking with lenders who are sympathetic to your situation.
Saving and Paying Out of Pocket
Some people with bad credit assume that borrowing just isn’t an option. If you convince yourself that this is the case, you may find yourself contemplating how you’ll be able to save up to afford a new car. You won’t just need a down payment—down payments are associated with loans, so if you’re trying to avoid financing, this isn’t a factor in your payment structure. You’ll need to pay for the full car out of pocket and up front.
Very few people make enough extra money every month to save up in a reasonable
amount of time. If you’re struggling to pay off high credit card or loan balances and using every extra penny toward this goal, the idea of quickly saving up several thousand dollars is likely to cause your stress level to immediately jump. Plus, if you are looking for financing because your car is on its last legs or is no longer operational, it may be impossible to wait until you’ve saved enough. It can take years to save that kind of money and if you need your car or truck to get to work, how are you supposed to make the income to save? This option just isn’t a good one.
Most people who own cars got them through financing, not by paying out of pocket. Even very wealthy people often obtain loans to buy their cars. It’s just not realistic for most people to save so much money every month when they really need to get a new car. So, while it is possible to pay out of pocket, it’s not a great option.
Avoiding Traps That Can Further Damage Your Credit and Your Overall Financial Health
So, financing through a company like Drive Thru Finance that specifically offers car loans for people with bad credit is a good option. But before you send in any applications or, most importantly, sign any loan agreements, there are a few things you need to keep in mind. Credit is fragile. Your score can take a multi-point nosedive in a matter of a single month. So it’s vital that you make the best-possible financial decision even though you can obtain financing. Don’t buy more car than you can afford. It can be tempting to go for something really over the top knowing that you have the ability to get a loan, but given that your credit is already suffering, further risk isn’t the best choice.
You should also understand the terms of your loan and read all the fine print very carefully before you sign. Honorable companies won’t try to mislead you, but they also won’t take issue with you asking questions and making sure you have all the necessary information to stay current on your payments and pay the loan off in full. Lenders want you to succeed. After all, that’s how they get their money back once they’ve loaned it to you.
Finally, remember that you are still in the driver’s seat even if you have bad credit. This is especially true if your credit took a hit due to circumstances that were outside of your control or if you have learned your lesson about how credit works and have adjusted your behavior and are on the path to recovery right now. Your responsibility at this point is to keep making smart choices that will set you up for continued success in the future.