bad credit car loans

Bad credit happens for all kinds of reasons; medical bills, divorce, lost jobs, or simply not paying bills on time.  Sometimes bad credit can prevent you from getting what you want, whether it’s a new apartment or a new cell phone plan.  Other times, bad credit can affect how much you pay for something, like insurance companies that charge higher rates to people with bad credit.  Bad credit doesn’t always kill you, but it can hurt you. One thing that bad credit usually doesn’t prevent you from getting is a car loan.  Today, nearly anyone can get a car loan, even if you have bad credit, but bad credit will definitely affect how much you pay in interest, your terms (like down payment and length of the loan), and maybe even how much you pay for the car itself.

Buying a Car with Bad Credit

Let’s start with the last one; why should I have to pay more for a car if I have bad credit?  There are two main reasons.

  1. First, no one wants to be rejected for anything.  People with bad credit know they have bad credit, so, many times they are more worried about hearing “yes” to financing than negotiating the price of the car.  As a result, dealers make more profit selling cars to people with bad credit because they price the cars higher.
  2. Second, when you buy a car and get a loan from any dealer (new or used cars), the dealer has many lenders they send the loan to.  If you have bad credit, it’s harder for the dealer to find a lender to take the loan, so they have to work harder.  If the dealer is making more profit on you (because you have bad credit) they have an incentive to work harder to find a lender to take the loan.

Getting a Car Loan with Bad Credit

Lenders charge more interest and offer less favorable loans to people with bad credit because people with bad credit tend to default on their loans more frequently.  Remember, everyone with bad credit has a reason, but the lender doesn’t know you.  They don’t know if you’re the person who had problems in the past and is getting better, or if you’re the one who is getting worse and is not going to pay their loan.  All they know is there are more losses on bad credit borrowers than good credit borrowers, so they do things to make bad credit borrowers profitable too.

Higher Interest Rates

The first is simple; lenders charge higher interest rates to people with bad credit.  When people with really good credit are paying 4% in interest, someone with really bad credit might be paying 20%.  That means the lender can afford to have five defaults for bad credit borrowers compared to good credit borrowers and still make the same profit.  It also means the person with bad credit has a monthly payment of $570 instead of $370 per month, on a $25,000 loan for 72 months.  It’s the same car at the same price, but the person with bad credit pays $14,000 more in interest over the term of the loan.

Down Payment

Lenders might do other things to reduce their risk.  For example, they might require a person with bad credit to have a down payment whereas someone with good credit can borrow for the full price of the car plus taxes and license.  That’s because starting with a lower loan amount compared to the price of the car reduces the lender’s risk.  If you have bad credit, saving for a down payment or having a trade-in can improve your chances of getting approved because you have “skin-in-the-game”.  You have something to lose if you default on the loan.

Improving Your Credit Score

It isn’t always fair, because usually people with bad credit cannot afford to pay higher rates or come up with down payments, but it’s a reality.  The good news is, bad credit doesn’t have to last forever.  Today, many lenders approve loans based on your credit score.  You can improve your credit score very quickly by first attacking balances on your credit cards.  Lower balances, or better yet no balances, on credit cards increases your score.  Second, no matter what, figure out a way to make your payments on time.  Every late payment hurts your score.   Last, wait a while and save some money for a down payment.  All of these things will lower your cost of interest, and lessen the total amount you have to pay.  Eventually, old mistakes fall off your credit report, and you’ll be the one paying 4% interest for the car loan.

Metro Credit Union | Best Car Loan Rates in Omaha

Our goal is to help you get the best deal possible, whether you finance with us or not! We'll use our resources to determine if you're paying a fair price for a new or used vehicle, whether you're getting the maximum out of your trade, and determine if your loan rate is competitive. All of this at no charge, with no sales pressure. It just makes sense to start your car buying experience with someone you trust, your credit union! Plus, we offer great deals on extended warranties & GAP insurance.