Buying a new or used car is a great way to get where you need to be without the hassle of dealing with public transport. However, this level of convenience can be hard to obtain if you are short on cash or have a lower than ideal credit score.
While a poor credit score won’t stop you entirely from being approved for a loan, it can limit the amount of lenders that are willing to approve you. You may also have to settle for higher interest rates along with associated fees like account setup and account maintenance fees.
When shopping around for the best possible bad credit car loan, you should take the time to do your research, compare lenders, fully understand the terms and conditions of the loan, and agree to a loan repayment schedule that you can afford without dramatically impacting your current lifestyle.
Here are 5 tips to help you secure a car loan with bad credit and on your own terms, too.
- A bad credit car loan is a special type of loan. It is designed to help those with bad credit to, fully or partially, finance the purchase of a new or used car.
- Bad credit car loans typically have a higher interest rate than standard loans. This is because the lender is taking on a higher level of risk to loan you the money that you need to buy a car.
- Most major banks and lenders have hard limits on whether they will approve a bad credit car loan. This has created a market of smaller, more flexible lenders, who specialise in working with people that fall under these unique circumstances.
- Bad credit car loan lenders take many steps to justify the risk of lending money to high-risk clients. These include having higher interest rates, using the car as security on the loan (otherwise known as a secured car loan), and having associated fees like account setup and maintenance fees as well as early repayment fees.
1. Do your Research and Compare Lenders.
There are a lot of bad credit car loan lenders out there, and they each have their own pros, cons, and terms and conditions. So be sure to shop around and compare lenders before you make your final decision.
When comparing lenders, you will need to consider the following criteria:
- Total loan amount (how much money the lender is willing to give you)
- Total amount of interest rate
- Flexibility for a weekly, fortnightly, or monthly repayment schedule
- The presence of associated fees like account setup and maintenance fees, as well as fees for repaying extra.
- Total duration of the loan (12, 24, to 48 months)
- Secured and unsecured loans (more on those later)
These are just some of the few factors to consider when looking for a bad credit car loan.
Ideally, you should go with a lender that will not penalise you for early, or additional, debt repayments. This type of fee exists only to benefit the lender, not you. So there is little, if any, reason to go for a lender that has this stipulation, unless the interest rate is low enough to justify the existence of the fee in the first place.
2. Settle on a Budget Before You Approach a Lender
Take the time to review your current finances before you apply for a bad credit car loan. Figure out how much money you have coming in and out each month, as this will help you determine what you can afford in loan repayments and ongoing car maintenance fees.
Think about the type of car that you want to purchase, too. If you are a single professional, then you may only need a light hatchback or sedan to get around. But if you are in a relationship, and if you have – or plan to have – children, then you may need something a bit bigger. The size of your car, and the features that you desire in a car, will influence the total cost of the car.
Decide if you wish to buy a new or used car too. Obviously, the cost of a new car will exceed that of a used car. However, the COVID-19 pandemic led to a surge in used car prices, due to a global computer chip shortage. In the face of long waiting periods for new cars, buyers flocked to the second-hand car market, leading to a significant rise in demand and prices.
Fortunately, Australia’s used car prices have started to fall over the past year but are still higher than pre-COVID levels. So, use this information to decide if you really need a car now, or if you are willing to wait for the used car market to simmer down more.
By understanding the current state of the car market, and having a clear price range in mind, you will have an easier time approaching a lender, asking for the amount you need, and establishing a fair repayment schedule.
3. Pay off the highest interest card first
If you are on the fence about a bad credit car loan, then consider alternatives that may better suit your needs.
One alternative to a bad credit car loan is to use a credit card, one with a low or zero interest introductory rate, to fund the purchase of your next car. By using a credit card with an introductory low or zero interest rate period, you will be able to fund the purchase of the car, without the need to pay high interest rates and fee.
The only downside to this is if you fail to pay off the full amount of the loan before the introductory low or zero interest rate period ends. When this happens, you may end up with a comparable, or higher, interest rate than that of a bad credit car loan. Therefore, only consider this option if you are confident in your ability to pay off the credit card loan in a timely manner.
Alternatively, if you do not wish to pursue a bad credit car loan or credit card purchase, then wait until your financial situation improves.
If you are not in a rush for a car, and you can expect your financial position to improve in a few months (i.e. you have just recently started a new job), then wait a while and revisit this option later. You may be in a better position to negotiate a lower interest rate and, if desired, ask for a higher amount of money to borrow.
4. Decide If You Want a Secured or Unsecured Loan
The two most common types of bad credit car loans you will find are secured and unsecured loans.
With an unsecured car loan, the car you buy with the loan money will serve as security for the loan. This means that if you fail to meet your loan repayment obligations, the lender may repossess and sell the car to receive a return on their investment.
An unsecured loan, on the other hand, lets you secure a new car with the loan money but without using it as a security. The downside to this is that you typically pay a higher interest rate.
Which option is right for you will depend on your unique circumstances. If you are confident in your ability to meet your debt repayment obligations, then a secured loan is a great way to lower the amount of interest you pay.
Although, if your credit score is too low, you may be rejected for an unsecured loan, as the risk of financial loss to the lender could be too great.
5. Consider a No Interest Loan
Depending on your financial circumstances, you may be eligible for a no interest loan. These loans let you borrow the money you need to fund the purchase of your next car, without paying any interest.
The eligibility requirements to be approved for a no interest loan are higher than bad credit car loans, as you must:
Have a single income of less than $70,000 (before tax).
Have a single income of less than $100,000 (before tax) with a partner or dependants.
Have experienced domestic or family violence in the past 10 years.
Have a pension card or health care card.
Have lived at your current address for three months or more.
Can show that you can repay the loan.1
If you fail to meet any of these eligibility requirements, you may not be able to secure a no interest loan.
You are also limited to a few amount of lenders that are willing to provide no interest loans, as well. Plus, the total amount of money you can request may be lower than that of a bad credit car loan. This is because no interest loans are typically reserved for lower amount, more short-term expenses, such as urgent car repairs or utility bills.
So, weigh up the pros and cons of this arrangement, and decide if it is the right option for you.
Secure Your Next Car With Confidence
Buying a new car is one of the most important decisions you will make in your lifetime. And it is one that you will make many times too. So if you need a new set of wheels and you are considering a loan to make it happen then be sure to do your research first.
Even if you have bad credit, there are lenders out there that you can work with to secure the right loan for you. They can review your finances, help you secure the most suitable loan, and provide support if your circumstances change in the repayment period.
Most importantly, try to avoid lenders that penalize you for early repayments. Remember, the goal is to get out of debt in the safest, most efficient way possible, without the risk of falling into trips that set you back further.
And, if you have any questions or concerns about an existing debt, contact Debt Fix today.
We have a range of debt solutions that can help you save money, put a stop to creditors calling you, and put you back in control of your finances. It only takes 30 seconds to get started, and there is no impact on your credit score when you get in touch with us.