Do you urgently need a new car but lack the necessary funds to buy one upfront? If so, then you may be compelled to apply for a car loan, enabling you to buy one and gradually pay off what you owe later.
However, if you are also in the unfortunate position of having a bad credit score, then your past financial activity may limit your odds of approval. Fortunately, there are lenders out there that specialise in bad credit car loans. They help applicants assess their finances, compare options, and secure the right loan for them.
Although beneficial, bad credit car loans may come with special conditions, such as higher interest rates. Explore your options first before pursuing this route. In this article, you’ll learn what a bad credit car loan is, its advantages and disadvantages, and how to improve your credit score before you apply for such a loan.
Key takeaways
- Bad credit car loans enable individuals with bad credit to fund the purchase of a new or used car, albeit with stricter lending requirements than standard car loans.
- Common conditions that come with bad credit car loans include higher interest rates, lower lending limits, and higher supporting documentation requirements.
- Improving your credit score (before you apply for a bed credit car loan) is the best way to increase your odds of being approved for one.
What is a Bad Credit Car Loan?
A bad credit car loan is a type of secured loan, where a lender agrees to fund the purchase of a new or used car for an applicant. The car is used as security against the loan in the case of a default. Bad credit car loans function like regular car loans, but they come with stricter lending requirements such as higher interest rates and fees, more documents to submit, and lower lending limits.
Stricter lending requirements protect lenders from financial risk, particularly if the applicant starts missing payments and defaults on their debt. It is also why the car is used as security. If a debt default occurs, the lender can reclaim the car and sell it, settling the remaining debt amount. Bad credit car loans typically have lower lending limits, ranging anywhere from $4,000 to $8,000 or more. Your financial status, choice of lender, and choice of loan will determine your maximum lending amount.
What Are The Advantages and Disadvantages of Bad Credit Car Loans?
There are many advantages and disadvantages to bad credit car loans. It is important that you weigh these up before you apply, as it will help you determine if such a choice is right for you. Here is a detailed rundown of the advantages and disadvantages of bad credit car loans.
Advantages of Bad Credit Car Loans
Be Able To Fund The Purchase Of a Car
Not having access to a car can be detrimental to your lifestyle. It can limit your ability to travel to work, school, shops, and other essential places. Being approved for a bad credit car loan means you can buy the car you need to get your lifestyle back. Even if you don’t buy the fanciest car in the world, having a functional and reliable vehicle will go a long way to improving your life.
Structured Repayment Plans
Although bad credit car loans can have high interest rates, a low lending amount may help make repayment easier. After all, the less you borrow, the less you have to repay. You may also have the flexibility to decide on a weekly, fortnightly, or monthly repayment cycle, so you can gradually repay what you owe on your terms.
Potential Increase to Credit Score
If you can successfully repay your bad credit car loan, then this positive financial activity will appear on your credit report, eventually improving your credit score. Just make sure you repay your debts on time and at a frequent basis. For the entire duration of the debt repayment period, too.
Disadvantages of Bad Credit Car Loans
High Interest Rates
Depending on your choice of loan, the interest you pay could be anywhere from 15 to 25% or more. Try to choose bad credit car loans with the lowest possible interest rate. Also account for other associated expenses, such as account opening fees. Some lenders also penalise customers who pay off their loans sooner than expected, charging early payment fees; try to avoid loans with these stipulations, as they benefit only the lender and no one else.
Increased Risk of Debtor Default
Bad credit applicants pose a greater risk of defaulting on their loans than those with good credit. This is because they have a history of late or missed payments, past bankruptcies, and existing debts to pay off. For these reasons, make sure you can comfortably repay what you owe. You can use an online repayment calculator to determine what you can afford to borrow.
Lower Lending Limits
With bad credit car loans, you may have limited borrowing power – as you pose a higher lending risk. Therefore, you may need to settle for an older and lower value car than what you would prefer. Ultimately, the goal is to purchase a functional and reliable car, so focus on achieving that outcome over anything else.
Best Practices To Follow When Applying For a Bad Credit Car Loan
Improving your credit score. That is one of the most effective ways to boost your odds of being approved for a bad credit car loan. It can also help increase your borrowing power, lowering the amount of interest you pay and negotiating a more flexible repayment plan.
Here are a few ways to overcome bad credit – before you apply for a bad credit car loan.
Pay Your Bills On Time, Every Time
For your ongoing bills – e.g. rent, mortgage, utilities, phone, internet – be sure to pay those bills on time, every time. This will show lenders you can comfortably meet your current repayment obligations, increasing your odds of approval. This kind of activity will also appear on your credit report, increasing your credit score.
Avoid Opening a New Line of Credit
Do you already have credit card debt or other personal debts? If so, do not open another line of credit. Doing so my signal financial stress to lenders, who may reject your application. Opening another line of credit can also cause you to sink further into debt. This means it will take longer for you to get back on your feet.
One way to overcome credit card debt is through credit card debt consolidation, where you combine your existing debts into one manageable payment plan. It may also help reduce the amount of interest and associated fees you are already paying, providing further financial relief.
Pay Off Your Existing Debts
If a lender sees you already have debts, they may not want to add to the pile and reject your request. For this reason, consider waiting. Work on your existing personal and credit card debts first. Keep in mind, you don’t have to completely pay off these loans, just make solid progress on them. This will show lenders that you are well on your way to financial freedom. They may then approve you on that basis alone.
Only Apply When You Are Ready
Did you know that each time you apply for a bad credit car loan that it appears on your credit report? For this reason, only apply if you are confident that you will be accepted. Too many rejected applications are a bad look, as it may cause lenders to deem you too risky and reject your request.
Seek Debt Relief Help With Debt Fix
Applying for a bad credit car loan is a great way to fund the purchase of a new or used car. But if you are concerned about your credit score, then consider improving your financial situation first. One way to do this is to formulate a plan to overcome your existing debts. If this is the case for you, then arrange a free, private, and obligation-free consult with a debt relief expert.
At Debt Fix, we closely evaluate your current situation and propose several debt relief options. You may be eligible for debt relief in the form of a credit card balance transfer, debt consolidation, or a formal debt agreement. Best of all? Your consultation with us is completely free and confidential, and it will not affect your credit score.
To arrange a free chat with Debt Fix today, let’s get started.
Frequently Asked Questions
What kind of vehicle can you buy with a bad credit car loan?
There is typically no restriction on the type of vehicle you can buy with a bad credit car loan. However, you may not be allowed to buy a vehicle for commercial purposes. The vehicle may either be new or used and either a car, van, truck, SUV, or 4WD. As long as the vehicle is for personal purposes and within your budget, then you should be allowed to buy it.
How bad is “too bad” of a credit score?
There is no hard limit on what is deemed a “catastrophically” bad credit score. Ideally, though, you want to be at least within the average range (460 to 600) or higher, as this is the basis that Equifax follows. Other credit reporting agencies have different criteria, so be sure to check more than one.
What documents do you need to apply for a bad credit car loan?
The documents you submit for a bad credit car loan may vary from lender to lender. In most cases, you will need to provide documentation that proves:
- You are 18 years or older
- You are a permanent Australian citizen
- You have at least three months or more worth of pay slips and bank statements
- If applicable, you have been discharged (or part of a formal debt agreement) for at least 12 months.