Finance or pay cash for a car when I have bad credit?
Paying cash for a car can get you something quick, but a quick fix doesn’t always last. As a borrower with bad credit, it may seem more possible to buy a car than to finance one, but it may not be right for all situations.
Buy a vehicle with cash
If you can afford to buy a car for cash, that’s wonderful! But how much car are you buying? Your vehicle selection is limited to the money you have on hand if you take that route. If you only have a few thousand dollars, it can be difficult to get a reliable vehicle for that price. This might not be a bad option, just remember that you get what you pay for. Financing may be able to get you a more expensive and more reliable car.
If you buy a vehicle with the money you have, there are certain advantages, such as:
- No monthly loan payments
- No interest added to the price of the car
- No need to qualify for an auto loan
- Can help you stay on budget without taking on more debt
- The total value of the vehicle is equity
- No impact on your credit reports or score
- No additional lender requirements to be met, such as full coverage insurance
However, keep in mind that there can also be downsides:
- Paying cash for a vehicle could deplete your savings, making it difficult to cover unforeseen expenses that arise with the car.
- You may have a more limited selection of vehicles to choose from
- Paying cash for a car doesn’t help you create credit
If you think your credit score is too low to get a car loan, you might be right, after all, you know your credit situation better than anyone (right?)!
TIP: If you are unsure about your credit situation, or if you don’t understand it, you might be at a disadvantage by thinking in terms of cash only.
Financing of a car construction loan
Financing a vehicle is a great way to improve your credit or start your credit history. If you never get new credit, your credit report will likely be rated as “thin” and you may have a hard time meeting credit score requirements if you ever need to borrow. The more debt you have and the more you manage, the better your credit rating will be.
Auto loans meet many of the credit building requirements for your credit reports, which are made up of five sections that combine to determine your credit score. Taking out a car loan is in addition to the information in each section of your reports.
To find out what’s on your credit reports and where your credit score is, you need to check your credit. But fear not, checking your credit yourself doesn’t impact your credit score like a lender would.
One of the easiest ways to do this is to visit www.AnnualCreditReport.com. This site gives you free access to all of your credit reports from the three national credit bureaus: TransUnion, Experian, and Equifax. You can now access this service to view your reports free of charge once a week until April 2022.
Subprime lenders finance bad credit borrowers
Not all lenders finance vehicles for all borrowers, so it’s important to minimize loan denial by shopping from the right type of lender for your credit situation.
If you are currently in a difficult credit situation, this may not exclude you from the race for a car loan. Subprime lenders who work through special finance dealers can help borrowers with no credit, no credit, and even bankruptcy or repossession in some cases. They can work with consumers with low credit because they don’t look at your credit score alone to make a decision.
In addition to your credit score, these lenders also look at the reasons why your credit score is the way it is. If you are currently in a difficult situation, but previously had a good credit history, you may have an even better chance of securing financing. It’s called situational bad credit, and subprime lenders understand that sometimes all you need is a chance.
Typical requirements for most bad credit auto loans include:
- Provide proof of income with your most recent computer generated check stub, showing cumulative income for the year. Most subprime lenders require a minimum gross income of around $ 1,500 to $ 2,500 per month.
- Provide proof of employment or proof that your income will continue for the duration of the loan. This can usually be met with your pay stubs or letters of attribution for non-employment income. The terms and conditions of employment of lenders vary.
- Provide proof of residence with a utility bill and / or bank statements in your name.
- Provide proof of a working phone, either a landline or a contracted mobile phone service in your name.
- Provide a list of five to eight personal references, with e-mail, home addresses and phone numbers.
A final requirement that most subprime lenders have is a down payment. This is actually a wonderful opportunity to turn the money with which you were going to buy a car into the first step towards financing a reliable vehicle.
Use your money as a down payment
Most lenders require borrowers with bad credit to make a down payment of at least $ 1,000 or 10% of the vehicle’s sale price, sometimes whichever is less. In most cases, the more down payment you can make, the more likely you are to get the loan.
Down payments have many advantages for a borrower financing a car:
- Reduces the amount you have to finance
- Reduces the amount of interest charges you pay over the life of the loan
- The more you drop off, the greater the choice of vehicles you can have
- A larger down payment may reduce the interest rate for which you are eligible
- You may qualify for better loan terms with a larger down payment
- May reduce the risk of negative equity
If you are planning to buy a vehicle for $ 3,500 because that’s all you can muster and your car is running out of steam, consider using that money as a down payment. Putting that much on a loan can open up a lot of financial doors for you.
If you plan on spending only $ 3,500 on a car, you will likely have a limited selection of vehicles. This is due to both rising car prices and the fact that vehicles in this price range may not be roadworthy any longer.
Now consider this: If you finance a $ 10,000 vehicle using $ 3,500 as a down payment, you only borrow $ 6,500. Even if you choose to finance for about five years and only get a higher interest rate (the average interest rate for borrowers in our dealer network is 13.6%), you don’t ‘Consider payments of around $ 149.90 per month.
Getting started with a bad credit car loan
Depending on the vehicle and your situation, a $ 10,000 car will likely be a better investment than a $ 3,500 car. The goal is to balance affordability and reliability and get a head start when you’re a consumer struggling with credit issues.
Relying on just cash to get what you can afford now might seem like a wise move, but you may have to repeat the process every few years if you can’t afford a vehicle that lasts. And, you can’t work on building or repairing credit if you don’t have proof that you can handle debt on your credit reports.
Subprime car loans through Special Financing Dealers are reported to major credit bureaus and can help put you on a solid footing to improve your credit score. Convinced that financing can be the best route, but you don’t know where to start? We have what you need.
AT Auto Express Credit, you can move on to your next auto loan by completing our fast, free, no-obligation auto loan application form. We’ll get to work right away, putting you in touch with a local dealership who has signed up with subprime lenders who are ready to help.