Can you get a car loan with bad credit? Absolutely, but you will have to know in advance that your loan might come with some unfavorable terms. It is helpful, however, to first consider the lending process and then to view it in terms of bad credit.
Lenders, whether they are strictly online, banks, or auto lenders will all have a similar application and approval process. One of the first things to happen is that the lender is going to scrutinize the credit history of the applicant. They are looking for evidence of any financial mismanagement that could lead to an inability to repay the loan, and they are also looking for any history of default. Usually they save themselves a lot of time and just request the credit score instead. This is a figure that takes into consideration a whole bunch of things, and it is used to measure the lender’s level of risk in providing a loan.
When someone is seeking a car loan with bad credit the lender is going to look for all of the ways in which they can offset the risk and yet still grant the loan. The most fundamental way of doing this is by charging a much higher interest rate. For instance, if average loan rates are around four or five percent, someone with bad credit could be paying almost ten percent on their loan. Additionally, many lenders will also elect to require borrowers to have some sort of down payment on the vehicle too. Even though this is just a small percentage of the purchase price it will still give the lender a bit more protection in the event of default.
Up to this point it has sounded like a car loan with bad credit is not a great thing, but it is in fact a fantastic tool for credit repair. If you can obtain a loan, make the regular payments, and completely pay it off, it will create a huge boost in the credit score. Additionally, many lenders are now offering refinancing on an auto loan, and this can be a great way to reduce the monthly payment and the interest on the loan as well. It is important to consider if there are financial savings to be enjoyed by refinancing a loan. This is particularly true for loans of shorter duration that are going to be repaid within a year to eighteen months of the refinancing.