Many people struggle with bad credit. This can be a huge problem in many aspects as doors are more likely to be closed than open if your credit score is anything less than good. However, there is hope. You can rebuild your credit and even do it by securing a car loan.
Can You Actually Qualify for a Car Loan with Bad Credit?
Of course, there are fewer opportunities to secure a loan if you have a bad credit score. This is because you are deemed a higher risk compared with someone who has good or excellent credit. However, car loans are different. There are car loans available for people who don’t have the best credit that can actually help you improve your score.
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What is the Relationship Between Credit Scores and Car Loans?
To refinance car, you need the right auto loan. There is a direct relationship between credit scores and car loans. A car loan comes in handy to rebuild your credit due to balancing out some factors found in your credit report.
FICO credit scores can range from 300 to 850. The credit score you have is based on a number of factors. Any information found in your credit report comes from your history of credit usage. Your payment history, how much you owe, credit mix, credit history and new credit all affect your creditworthiness and credit score.
What many people don’t know is that loans, including car loans, are also considered forms of instalment credit. These carry more weight than credit cards and other types of revolving credit, which is why it’s good to qualify for a car loan when you need to rebuild your credit and improve your score.
How Can a Car Loan Help You Rebuild Your Credit?
When you qualify for a car loan and begin making timely payments toward it each month, it helps you to improve your credit. Your payment history makes up to 35 percent of your credit score, so making payments toward a loan can help a lot. Your payments are rightly reported to the major credit bureaus and your credit score begins to increase as a result.
It is crucial to pay at least the minimum toward your loan each month. If you default on a payment, it can cause your credit to take a hit. Remember that car loans are instalment loans, which means you agree to make repayments borrowed on time for a set amount of time.
Getting a car loan also helps to improve your credit because it affects your credit mix, which makes up 10 percent of your score.
How Do You Get a Car Loan with Bad Credit?
Once you have decided to get a car loan while you have bad credit, you may wonder where to start. According to Lantern by SoFi, “when an individual applies to refinance with a new lender, there is typically a credit check of some kind.” Generally, due to your lower credit score, you would have to look toward subprime lenders. They are lenders that exist specifically for the purpose of helping individuals with bad credit to get car loans. The loans these lenders offer can serve a twofold benefit in helping people be able to buy a car and allowing them to improve their credit score.
Subprime lenders will look at your financial situation, including your income and ability to repay. They also note your living situation and whether you are able to put a downpayment toward your car loan. They may require proof of your identity, employment, address and phone number and ask for a list of personal references who can vouch for you.
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Usually, subprime lenders require a downpayment of $1,000 or 10 percent of a vehicle’s cost, whichever is less.
While securing other loans might be a challenge, it’s easier to get car loans with bad credit. Once you have your loan and begin paying it off, you will notice your credit score beginning to gradually improve.