bad credit car dealer in 2023

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Navigating Bad Credit Car Buying at Dealerships in the U.S.

Having less-than-perfect credit can make securing an auto loan more challenging. But with the right preparation and negotiation tactics, those with bad credit can still work with specialized dealers to buy a reliable car.

In this guide, we’ll cover tips for getting approved for dealer financing with bad credit and avoiding common pitfalls when shopping for a car in the U.S.

Defining ‘Bad Credit’ for Auto Loans

First, what exactly constitutes bad credit for car loans? Here are some general credit score guidelines:

  • Excellent credit: 750-850 FICO
  • Good credit: 670-749 FICO
  • Average credit: 580-669 FICO
  • Bad credit: Below 580 FICO

The average credit score of U.S. car buyers is around 690. So having a score under 580 will put you in the bad credit range where dealer financing is still possible but more expensive. Slow credit payment history, collections, bankruptcies, and excessive debt hurt your score.

Getting Pre-Approved with Bad Credit

Before visiting dealers, try getting pre-approved to see what loan terms you can qualify for. Check with local banks, credit unions, and online lenders. This gives you a benchmark for the type of financing available based on your credit score.

With very low scores below 550, you may need to explore subprime financing with high interest rates and large down payments. Or look at rebuilding your credit first before applying.

Once you have a baseline for potential rates and qualified loan amounts, you can better comparison shop at dealers.

Getting Pre-Approved With Bad Credit
Getting Pre-Approved with Bad Credit

Choosing the Right Bad Credit Car Dealership

Not all dealers work with bad credit customers. Look for Buy Here Pay Here (BHPH) dealers that specialize in financing buyers with past credit challenges. These lots flexibly work with bank partners to get loans approved for subprime buyers.

Read dealer reviews online and check their Better Business Bureau rating. Visit a few BHPH lots to get a feel for their prices and inventory. Developing relationships with dealers willing to work with your credit situation is key.

Expect Higher Rates and Down Payments

The cost of borrowing will be significantly higher with low credit scores. Here are some typical bad credit auto financing terms:

  • Interest Rates: 8% – 22%
  • Down Payment: 20% or more
  • Term Length: 36 – 60 months

Rates over 20% are common for buyers with credit scores under 500. Expect to put at least $2,000 – $4,000 down as well.

Expect Higher Rates And Down Payments
Expect Higher Rates and Down Payments

Bring Proof of Income and Residency

In addition to your driver’s license, dealers will want to verify your income sources and stability. Bring recent pay stubs, tax returns, bank statements or anything else that documents your financial situation. Proof of your current address like a utility bill is also required.

Negotiate Everything – Price, Trade-In, Interest Rate

Don’t accept the first offer from the dealer. Negotiate the vehicle price, trade-in value, interest rate, loan length, and down payment amount. Even buyers with bad credit have some leverage to secure better terms. Aim for the shortest loan length you can afford.

Negotiate Everything - Price, Trade-In, Interest Rate
Negotiate Everything – Price, Trade-In, Interest Rate

Watch Out for Extra Fees and Add-Ons

Scrutinize the purchase contract carefully and resist unnecessary extras the dealer may try to tack on. Avoid things like extended warranties, interior protection packages, and expensive GAP insurance. Just focus on getting the lowest purchase price at the best interest rate.

Consider Bringing a Co-signer

Adding a creditworthy co-signer like a parent or family member can help you qualify for much lower interest rates. This also allows higher loan amounts and lower down payments. Just make sure the co-signer understands they are equally responsible for making payments.

Beware of Very Low Down Payment Offers

Some dealers advertise new cars for just $99 down for those with bad credit. But read the fine print! There are often hidden fees rolled into the loan amount. You may end up way upside down on the loan. A more reasonable down payment of 10-20% of the car’s value is recommended.

Understand the Higher Repossession Risk

With subprime financing, lenders face a higher risk of default and repossession. Be realistic about the payment amount you can handle monthly to keep the car. Build in some financial cushion for repairs and medical expenses too.

Understand The Higher Repossession Risk
Understand the Higher Repossession Risk

Consider Buying an Older Used Car First

For those with very poor credit below 500, buying an older used car first and diligently making payments can begin rebuilding your score. You can then refinance the loan in 6-12 months at a much lower interest rate. Starting with a newer car makes this process harder.

Maintain Full Coverage Insurance

Lenders will require you to carry full coverage insurance with comp, collision, liability, and uninsured motorist coverage. Get quotes from several insurers, as rates can vary widely between companies for those with poor credit.

Be Wary of Loan Add-Ons

Many dealers try to sell extras like extended warranties, rust-proofing treatments, and paint sealants. But these add-ons are usually overpriced and unnecessary. It’s best to just focus on getting the lowest car price and interest rate. You can decline these extras.

Check for GPS or Kill Switch Devices

Some subprime financing companies require GPS tracking devices to be installed in the vehicle. This allows the lender to remotely disable the vehicle if payments are missed. Make sure you understand any tracking policies.

Don’t Stretch Your Budget Too Far

While tempting, avoid buying a car where the monthly payments stretch your budget to the breaking point. If your budget is tight, look at less expensive vehicles so you aren’t living paycheck to paycheck. Some savings cushion is important.

Review All Paperwork Thoroughly Before Signing

Never sign contracts you haven’t read thoroughly first. Go through all paperwork line-by-line and ask questions about anything that is unclear before finalizing the deal. Don’t feel rushed by the dealer.

Down Payment Assistance Programs May Be Available

If the required down payment is a roadblock, check for nonprofit down payment assistance programs in your area. Organizations like United Way sometimes have grants or low interest loans to cover the down payment for qualifying buyers.

Bad Credit Car Buying Requires Extra Diligence

Buying a car through a dealership with poor credit scores is certainly possible, but will require some extra work. Following the tips above can help you negotiate the best deal while avoiding unrealistic financing offers and unnecessary fees. Take the time to shop around with multiple dealers and don’t settle for the first offer. Carefully managing your auto loan and staying current on the payments can also start to improve your credit over time.

FAQs

Q: What interest rates can I expect with a 500 credit score?

A: With a score around 500, expect interest rates from 15% – 22% at most dealerships. Shop around for the best rate.

Q: Is it better to save up and pay cash with bad credit?

A: Paying cash is always ideal, but requires discipline to save up. Bad credit financing allows you to buy sooner if needed.

Q: Should I buy new or used with bad credit?

A: Lightly used 1-3 year old models are best. Avoid brand new cars where depreciation makes it harder to build equity.

Q: How can I ensure there are no hidden fees?

A: Thoroughly review all paperwork and ask questions. Don’t sign anything you don’t fully understand.

Q: Are dealer-arranged loans worth the higher rate?

A: Dealer financing can simplify the process but compare options from banks/credit unions too for potentially better rates.

Conclusion

For car shoppers with low credit scores, buying from specialty bad credit dealerships can provide a path to getting approved. But it requires carefully comparing options at multiple dealers, negotiating aggressively, and avoiding unnecessary add-ons. Stretching too far financially is risky, so be realistic about payments you can afford monthly. If managed carefully, subprime car loans can help people get back on the road and start rebuilding their credit over time.

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