Cars are expensive, with the average price of a new vehicle in 2022 standing solidly above $48,000, and the costs keep rising. Therefore, you must figure out a smart way to finance your car before making a purchase.
Because most people turn to auto loans looking to finance a car purchase, your options might seem limited, especially if you have a poor credit score. Fortunately, there are still tips you can use to secure financing for your dream car, and here are five of them.
1. Get an Auto Loan
You can still get approved for an auto loan even with a poor credit score. However, most financial institutions will charge a higher interest rate on auto loans for people with bad credit scores because a greater risk is involved in lending to them.
But you must do a lot of research by getting quotes from different lenders if you want to get a good deal on auto loans for bad credit. As you shop around, compare interest rates and hidden charges before choosing who to work with.
An ideal lender for auto loans for bad credit should offer flexible payment plans and prepayment options to help you manage your debt better. Stay away from lenders who charge high prepayment penalties, as that can significantly increase the cost of your loan in the long run.
2. Get a Co-Signer
Getting a co-signer might be another excellent way to get a loan to finance your new vehicle purchase if you have a poor credit score. A co-signer is someone who signs a loan agreement or promissory note alongside the borrower.
Co-signers agree to repay the loan if the borrower fails to pay it according to the terms specified in the agreement. Typically, these people have positive credit histories and make the loan more financially attractive to the lender.
By obtaining a co-signer, you can get better terms and a lower interest rate on your auto loan, making it easier for you to afford the payment.
3. Make a Large Down Payment
Making a large down payment reduces the amount of loan you need to obtain, significantly lowering the risk of default. As a result, this will improve your chances of getting approval for an auto loan with a favorable interest rate and affordable monthly payment terms.
Also, since larger down payments are a sign of financial responsibility, they can help boost your overall credit rating, making it easier for you to obtain loans in the future.
Sometimes, you can even use a larger down payment to negotiate a waiver on your loan application’s upfront fee.
4. Skip the Optional Extras
Opting for high-end models with extra features in the showroom might be tempting. However, this may not be an ideal option if you’re on a tight budget. Although these extras may look great, they come at a high cost that you’ll have to pay eventually.
It will help if you opt for a model with few basic features as this can save you a substantial amount on the purchase cost. Furthermore, some extras, such as leather seats or an upgraded sound system, may be expensive to replace or maintain down the road. This can cause an extra financial burden, especially if you acquired the car through a loan.
5. Apply for Pre-Approval
A pre-approval is a letter from a lender indicating their willingness to offer you a loan at a certain rate and for a specific period. Simply put, it is a promise from the lender that they will finance your car purchase if they receive your application and other vital supporting documents.
Getting pre-approved can help you narrow your options to focus on the cars within your price range. It also gives you a bargaining chip when making your offer on the car of your choice to car dealerships.