Just because you have poor credit doesn’t mean you can’t get the car you want. Believe it or not, there are bad credit car finance options that you can choose from.
With these auto financing options, you can buy a car even if your credit rating isn’t as good as you want it to be.
No matter what financing option you choose, though, what matters is that you save up enough money for the higher interest rates and the on-time monthly payments that these options usually require.
Your credit score largely relies on your credit history, which is detailed on your credit report. Many factors can affect your credit score; for instance, you may have had trouble paying your credit cards in the past or you may have filed for bankruptcy at some point.
These risk factors lower your overall credit rating. A low credit rating makes you seem like a bigger financial risk, which could lead lenders to give you financing options that have higher annual percentage rates.
When you apply for a car loan, banks and financial institutions typically put your FICO score into one of six tiers. Annual percentage rates and the loan interest rate vary depending on the tier you fall into.
A FICO score of 660 to 850 falls into Tiers 1, 2, or 3. Financing companies may also call Platinum, Silver, and Gold Tiers or Tiers A, B, and C. These higher tiers are reserved for individuals with good to perfect credit scores, which are eligible for average or above-average rates.
If you have a credit score of 620 to 659, you fall into Tier 4, which is reserved for average credit ratings. You will most likely have your credit checked more thoroughly before lenders approve you for the financing option you want.
Tiers 5 and 6 are reserved for credit scores between 500 and 619. Tier 5 credit scores, which start at 580 and end at 619, are considered subprime. With these credit scores, your interest rates will be a few points higher than the average interest rate.
You may also be required to have a co-signer for your loan. For Tier 6 credit scores of 500 to 579, car loan interest rates are even higher. Lenders may also require you to have a co-signer or collateral for your loan.
You have a few options to choose from if you’re a car buyer with poor credit. With these financing options, you can get help for the cost of your new car.
These options present a lower risk for the lender, so there’s a bigger chance that you’ll get the financing option you want even if your credit history isn’t as good as you want it to be.
Certain lenders and car dealerships offer non status leases. These leases are so named because your credit history is the main basis for the approval of your application.
The lender considers your circumstances as a whole instead. Non-status leases are specifically designed for individuals with bad credit scores.
Since your credit history isn’t considered by the lender, non-status leases often require more expensive monthly payments.
Another unique factor of non-status leases is that having a non status lease doesn’t mean that you own the end of the car.
At the end of the loan term, you can opt to pay a pre-agreed lump sum to gain ownership of the car, opt to get a new car, or simply give the car back.
A hire purchase agreement isn’t technically a car loan, but it’s a good auto financing option especially for those with a less-than-perfect credit rating.
In a hire purchase agreement, you hire the car from your lender in exchange for monthly instalments on the purchase price. Once the agreement is up, you get ownership of the car for a small fee.
This is a good option if you’re likely to be turned down for a personal loan because of your FICO score.
Hire purchase agreements are less risky for lenders because they can take back the car if you miss any monthly payment.
This is why individuals with a bad credit rating may have a higher chance of being approved for hire purchase agreements.
The downside is that hire purchase contracts are often more expensive, with higher annual percentage rates and time payments.
You may find it difficult to get approval for personal loans, but you might have a bigger chance at loan approval with a secured personal loan.
Secured loans are less risky for lenders because these are guaranteed by a valuable possession on your end. For instance, you can use your home, a savings account, or even valuable jewelry as collateral for your loan.
If you fail to make monthly payments on your loan, the lender can take possession of your collateral.
Secured personal loans tend to be more flexible, allowing you to spread payments over longer periods of time and making it possible for you to get a bigger loan amount.
Since there is less risk involved for lenders when it comes to secured personal loans, lenders tend to be more sympathetic to applicants with a poor credit rating.
However, keep in mind that defaulting on a secured loan will damage your credit score even further.
A guarantor loan is one of the best auto financing options for individuals with a low credit score.
For a guarantor loan, you need to ask a friend or family member to act as guarantor and agree to take up your debt in case you lose the ability to make monthly payments.
Since the guarantor will also have his or her credit checked, he or she will need to have a good credit history.
additional security, the guarantor may also be required to put up a valuable possession. If you and your guarantor both can’t continue making payments, the lender will take possession of the collateral.
The downside of a guarantor loan involves higher interest rates. You can expect to pay as much as 40 to 50% interest rates, which may be too high for your budget.
If you do manage to regularly make on-time monthly payments, though, you’ll be able to improve your credit score. With a better credit rating, you’ll be able to qualify for lower annual percentage rates and a shorter overall loan term as well.
Plus, you’ll enjoy easier loan approval for your future car-buying needs. This can greatly improve your financial situation in the future.