Imagine you were one of the millions of people laid off early in the pandemic and, for the next few years, you struggled to find consistent work. In the meantime, your spotty income led to late payments on student loans and credit cards. Eventually, it impacted your credit to the point that your score went from good to bad.
Now, you’re trying to get an auto loan to buy a car you desperately need for your new job, but lenders are consistently rejecting your applications because of your bad credit score. What do you do?
That’s a question that many consumers are likely asking, as millions are likely dealing with lower credit scores because of late payments on student loans, mortgages and other forms of lending, according to the most recent household debt data from the Federal Reserve.
In fact, more than 13 percent of consumers have credit scores that fall in the “bad” or “poor” range – 300 to 579 – according to the most recent data from credit bureau Experian. From a lender’s perspective, scores in that range mean you’re going to get an interest rate that’s twice as high as someone with a 680, said Naeem Siddiqi, senior risk advisor at data and AI provider SAS.
So, should you give up the hope of buying a car if you’re one of the millions of consumers with a bad credit score? No. There are several steps you can take to improve your chances of getting an auto loan.
Check your credit
Around 13 percent of credit reports have errors in them, according to a report by consumer review and ratings firm Consumer Reports. Past research has found that the number could be as high as 20 percent, a landmark 2012 Federal Trade Commission study found.
A subsequent study from the commission found that one in five consumers who found errors in their credit report saw their score go up enough to move them into a better credit score tier. As a result, those consumers were “more likely to be offered a lower auto loan interest rate,” the follow-up study found.
Know your limits
Credit scores are built on multiple factors, with on-time payments and credit utilization being the two most important. “Credit utilization” refers to the ratio of a credit card’s balance to its credit limit.
Generally speaking, credit scores increase noticeably once credit card balances drop to 30 percent or less of their limit. Those with extra funds saved up may want to pay down one or two cards to give their score a boost.
Keeping your utilization is one of several things consumers can do to improve their credit score, Siddiqi said.
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“There are few short-term quick fixes for bad credit scores,” Siddiqi said in an email to The Independent. “Ideally, you want to continue making all payments, keep your revolving utilization rates low, not apply for new credit and hope for the best.”
Combining lower utilization with on-time payments and no new credit requests can make just enough of a difference to push your score into the next tier and earn better terms for your auto loan.
Down is up
Ideally, auto loan lenders want borrowers who make a down payment and have a good credit score. Those two factors lower their risk – they get more money upfront and a borrower with a lower chance of defaulting on their payments, Siddiqi said.
“The higher your credit score, the lower your probability of not paying back your loan ... per the lender’s credit risk models,” he said. “So, with a higher credit score, you have a better chance of getting approved and receiving a lower rate.”
If a borrower doesn’t have a good credit score, they can leverage a down payment to lower the lender’s risk, and, in theory, their chances of getting better loan terms go up.
“Get some cash and be prepared to make a higher down payment; lenders are more likely to lend money when their exposure is reduced through a higher down payment,” Siddiqi said.
Shop around
One of the best ways to find the lowest rates if you have bad credit is to get auto loan quotes from multiple websites. Doing so helps you see how each lender’s interest rates, loan length and monthly payment compare.
If your credit score is so low that lenders are rejecting your requests for prequalification, you may have to turn to lenders that specialize in borrowers with bad credit. But beware, Siddiqi says.
“There are many [bad credit] auto lenders in the U.S. who will lend you money at higher interest rates,” he said. “These rates may be two to three times what you can get as a [a customer with good or excellent credit] at a large bank. The best thing you can do is to shop around; even a 5% difference in interest rate can mean significant savings.”
This article is sponsored by Credit Karma. We may earn a commission if you engage with their services using links in this article.
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