The first thing to remember when buying a car with bad credit is that you are a valuable customer to the car dealer. Dealers realize that if they don't sell you a car their competitors will.
That being said, if you have bad credit and you want the best possible deal, I recommend that you approach your purchase a little differently. Keep in mind, almost all dealerships will have secondary lenders they can use to finance their customers with less perfect credit.
The first step to buying a car with bad credit is to learn your credit score. You can get a copy of your credit report from one of the three major credit reporting agencies. These agencies are Experian, Equifax and Transunion. You can receive a free copy once a year from annualcreditreport.com or call 1-877-322-8228.
Each of these credit-reporting agencies has system that will produce a credit score. These scores numerically represent an individual's credit worthiness. Each agency has a different scoring system. However, they all have similar results.
In essence, if your credit score is over 700 you are most likely a good credit risk. If your score is from the mid to high 600's, you probably will get a loan without too much trouble but maybe not at a premium interest rate. From the mid 600's and below you could be considered a poor credit risk.
Different Credit Score
Also, don't be surprised if the car dealer's pull a different credit score than what you received from annualcreditreport.com. This is because car dealers are provided a special "Auto Fico" score. This score reflects credit worthiness of a car purchase and this is only provided to the dealer.
Credit scores are affected positively by accounts paid as agreed and are negatively affected by late payments and collections. Also, these scores will reflect your length of credit history. The longer you have an open account that is in good standing, the better.
A major factor that determines your score is the amount of your available credit. For example, let say you have a credit card with a $5000 limit and you owe a balance of $4500. This will lower your score because it appears that you are spending more than your income would allow and banks will lend you money based on what you can repay every month.
How Much Can You Finance On Your Next Car With Bad Credit?
How much banks will lend you is the most important factor to know when you are buying a car with bad credit.
This means (take a deep breath) you should have the car dealership check your credit before you select a car. I realize this advice is in direct contrast to what is normally recommended. However, by doing this, the dealership's finance manager can recommend what price range of vehicle you should be considering. Remember, it is in the dealer's best interest to secure financing for you.
The traditional method to buy a car customers will select a vehicle, go on a test drive and then make an offer. However, if you have bad credit you could be wasting valuable time trying to buy a car that the bank will not finance.
I am not recommending that anyone allow the dealership to select a car for you. In other words, be very skeptical of the salesman that tells you that you are only able to buy a car that the sales manager have chosen for you.
What you want the dealership to tell you is how much car you can afford. Then look through their inventory and find a car that you like. If they don't have the car that will work for you then move on to the next dealership. At least now you have a good idea of what price range of vehicle you can afford.
Once you have selected a vehicle based on these parameters you can begin to negotiate the best price. Refer to our Car Buying Guide for great tips on how to negotiate the best price on your next car and pay special attention to the car dealer’s back end profit and buy-rate.