There is no shortage of frustration faced by those buying a car with bad credit. If you’ve never had to endure this particular challenge, you may be inclined to make assumptions about the reasons why someone would have bad credit in the first place. After all, what could have caused it beside blatant delinquency and/or fiscal irresponsibility?
Well, it’s easy to cast aspersions on anyone in the absence of factual information. So, unless you’re reading this with an open mind, you might want to seek out another article. And if you’re here because you’re researching ways of buying a car with bad credit, breathe easy.
You Are Not Alone
First things first, it’s estimated that 1/3 of Americans are denied some form of financing, be it a mortgage, auto or personal loan. In most cases, this is based on their having a credit score of 601 or lower, placing them in the ‘poor’ to ‘bad’ range.
Aside from their difficulty or inability to secure traditional financing, what does this say about that segment of our population. In the eyes of a credit bureau, creditor or lending institution they are simply labeled as ‘delinquent’. But this
The Two Faces of Delinquency
While we have no intention of validating true delinquency, we should understand what separates it from the connotation attached to contractual delinquency. Why? Because there’s a massive distinction between someone who doesn’t pay their bills, and someone who wants to but is unable to. To clarify: the former is a true delinquent, the latter is in a state of delinquency. While the distinction may not matter to lenders, a state of delinquency can be caused by every day events, and you may not be as safe as you think.
Are You At-Risk?
Ask a reputable financial adviser, and they’ll recommend that you work towards a savings equivalent to (no less than) your annual expenses. Now, let’s put that into perspective with some real world numbers. A recent study found that, as of mid-2017, approximately 61% of Americans have less than six months worth of expenses put away in their savings.
In fact, one-third of Americans don’t have an extra $500 set aside for emergencies. Let that sink in. An unexpected vehicle or home repair. Extended illness or medical emergency. Sudden unemployment. For a third of Americans, such an event could be catastrophic to their finances. That said, some people might not want to get too comfortably atop their high horse. It might only take one bad day for them to find themselves unable to pay their bills, and be labeled as a ‘delinquent’.
Now that we’ve covered some basics of economy and finance, let’s take a look at auto loans. As of mid-2017 approximately 43% of the adult population of the United States possess some form of auto loan debt. Equivalent to approximately 107 million Americans, this reflects a 33% jump from the 80 million indebted Americans that were reported in 2012.
And of those 107 million Americans with auto loan debt, approximately 6 million on behind on their car payments by 90 days or more. Speaking to some of the points covered above, it becomes easier to rationalize how quickly someone could fall into delinquency. As a result, it becomes easier to defend many of them, based on their respective circumstances.
Considering just how many Americans are in delinquent status or at-risk, it also becomes easier to understand the epidemic nature of this problem. In terms of auto loan delinquency alone, current statistics reign as the highest rate of delinquency seen since 1996. And with increased interest penalties getting tacked on, there are few resources helping these borrowers to get back into good standing.
Okay, fine. Maybe not. Come to think of it, everything we mentioned above can be sort of depressing when we think about what that means to our overall economy. But if nothing else, we’ve been able to lend some perspective, and take away some of the stigma of bad credit.
That said, what steps should you take in order to…
Secure Auto Loan Financing
First off, don’t assume that your bank or credit union will turn you down for an auto loan. A common misconception is that you are not eligible for traditional financing based on being previously declined. Allow me to clarify…
Let’s say you were hesitant to apply for an auto loan, because you’d previously been declined for a mortgage. While many people feel this way, it’s important to understand that the criteria for an auto loan differ from that of a mortgage. While policies differ from institution to institution, it’s definitely worth confirming since you may receive the best rate from your own bank.
Another option worth considering are auto finance specialists. These third party lenders have no affiliation with either your bank or the dealership, they simply provide financing to those unable to secure it from traditional lenders. Terms, conditions (and yes) credibility my differ, so do your research to make sure that you understand the way such lenders work.
Dealerships can also provide assistance, through a couple of different options. The most common method is for their Finance Dept. to work through their network of lenders to secure for you the financing that you need. Truth be told, many car buyers choose to utilize dealer-assisted financing without even exploring the options we mentioned above. We do not recommend this.
Some dealers also offer what are called ‘Buy Here Pay Here’ services, which allow them to act as the lender on a vehicle they are selling you. This is common means of assisting customers with subprime credit scores, who have been unable to get financed. In these cases you make your payments directly to the dealership.
Don’t Fool Yourself
No matter which option you explore you should expect to be financed at a higher interest rate than someone possessing a higher credit score. That’s just a simple fact. Accept it and make sure that you understand how it equates to your payment amount and the length of your loan. Failure to do so could prove detrimental to your (already) sensitive finances.
However, understanding it could allow you to find a great financing option, ensuring not only your happiness in a new car, but the opportunity to repair your credit through on-time payments. Do this, and your next vehicle purchase down the road might prove much easier.