Can You Purchase a Car If You Have Issues With Credit?

For a wide variety of reasons, your credit score might not be where you want it. However, it is possible to buy a car with less than desirable credit. There are also things you can do to reduce your overall monthly payment if you have credit issues, such as making a larger down payment. Your credit score has a direct impact on your interest rate when your financing package is put together. Let's take a look at how you can purchase a car if you have a lower credit score than average.

How do you get approved for an auto loan?

Before you are approved for a loan, the lender pulls your credit report. Your credit report and score determine whether you are approved for a loan and what interest rate you get. The lender will pull your credit report from either Equifax, Experian, or TransUnion. Lenders will use either of these credit agencies to determine your credit score. If you are purchasing a new car, the interest rate at your credit tier will likely be lower than if you had secured a loan for a used car. According to Experian, these were the average interest rates at each tier of credit score:

• A credit score of 720 to 850 will get you an interest rate of 2.49% on a new car and a 3.61% on a used car.
• A prime credit score of 660 to 719 will get you a 3.51% interest rate on a new car and a 5.38% on a used car.
• A nonprime credit score will be between 620 and 659, resulting in a 6.07% rate for a new car and 9.80% on a used car.
• Subprime and deep subprime credit scores are below 620, with interest rates at 9.41% or higher on a new car and 15.96% on a used car.

While there isn't a set formula for loan approval, there are some factors that may result in a denial. These include:

• A lower credit score: Most lenders want to see fair credit, at least a score of 620 or higher.
• Limited credit history: This impacts first-time buyers frequently. If you don't have a credit history, you may want to take on smaller amounts of debt, like a credit card, to start building up your credit.
• DTI (debt-to-income ratio): A DTI ratio of 50% or higher will often result in a loan denial.

A loan denial from a particular lender doesn't necessarily mean you won't be able to buy a new car. Dealerships usually have a portfolio of lenders that they work with who lend to people with all types of credit backgrounds.

How can you prepare for the auto loan process?

You can start getting ready for the loan application process by getting control of your finances. Here are some general tips for working on your credit:

• Make sure that you pay your bills on time each month. If you are late on a bill, try to pay it within 30 days of the original due date, as it won't go on your credit report in most situations.
• Pay down your credit cards. It can take as long as seven months for debt changes to be reflected on your credit report.
• There may be errors on your credit report. Dispute anything that does not look right to you.
• Hold off on other loans that you don't necessarily need to take out at the given moment.

How does a car loan impact your overall credit?

When you are shopping for a car loan, you probably have two concerns. The first is whether a hard credit pull will impact your score. The second concern you might have is how taking on additional debt hurts your credit. When you apply for an auto loan, there may be multiple inquiries into your credit from different lenders. If your credit score is borderline, you shouldn't worry about the multiple hard pulls, as they get rolled into one inquiry. A hard pull usually only drops your credit score by a few points.

When you are approved for an auto loan, your credit score will also drop by a few points. Your credit score will improve over time as you make payments. Additionally, your credit score will also improve, as in most cases, an auto loan improves your overall credit mix.

How long does it take to improve your credit score to get approved for a car loan?

Your credit score can be improved in as little as thirty days, depending on your financial situation. A missed payment on a credit card won't be reported if you act within thirty days of the deadline. Here is a breakdown of how long various types of credit issues stay on your report:

• General credit card issues: Three months
• Late mortgage payment: Seven months, depending on the lateness.
• Foreclosures or bankruptcy: These can take anywhere from seven to ten years to come completely off your record.

Is it worth it to work on your credit before you buy a car?

Let's say that you are looking at a Honda Civic with an MSRP of $27,029, a down payment of $5,000, and an interest rate of 3.5%. You will pay just over $2,000 in interest over the life of that loan, assuming a loan term of sixteen months because your credit score is in the prime category. Let's say that you have a credit score of 655, which is just five points shy of the prime category. The same Honda Civic with a credit score of 655 will fall into the subprime category, which has an average 6.07% interest rate. You will pay $3,566.98 in interest over the life of the loan. By improving your credit score, you will have saved $1,500.