Americans who are shopping for a new auto loan but don’t have the best credit can find themselves spinning their wheels, unable to move forward to a car purchase. Qualifying for a car or truck loan can be tough enough with toxic credit, let alone trying to find a good deal with low auto loan rates and favorable payment terms from auto industry financiers.
Why It’s Getting Harder to Qualify for the Best Auto Loan Rates
You can’t really blame the auto finance industry, however. With the economy getting better, lenders’ auto loan portfolios are growing: According to recent data from TransUnion, average auto loan debt per borrower is expected to rise to $18,244 at the end of 2015. That translates into 19 consecutive quarters of increases since the first quarter of 2011, when auto loan debt was at $14,954, per individual. This strong demand for auto financing allows lenders to be much choosier about who gets a green light for a new auto loan.
And auto lenders have further reason to be cautious because auto loan delinquency is on the rise. TransUnion estimates the national auto loan delinquency rate (the ratio of borrowers 60 or more days past due) will be at 1.27 percent at the end of 2015, up from 1.20 percent in 2014.
All that means a busier market for auto loans, and tougher climate for consumers burdened by bad credit.
5 Ways to Get Auto Financing With No Credit or Bad Credit
Despite the greater market factors, there are ways individual consumers can get solid auto loan deals even with credit problems. For starters, improving your credit score quickly can help. A secured credit card is an accessible credit product that can help to start repairing bad credit, said Harrine Freeman, author of the book “How to Get Out of Debt: Get an ‘A’ Credit Rating for Free.”
If you don’t have time to wait for your score to improve, there are still some measures you can take to improve your chances of getting a better auto loan deal. Here are five ideas that can make it easier to obtain auto loan financing with no credit history.
1. Open a savings or checking account.
Opening a savings account or checking account and keeping it in good standing can help you establish a relationship with a lending bank. “Once you have maintained an account for at least three to six months, ask if you are eligible to apply for an auto loan,” said Freeman. “Applying for an auto loan at your bank, where the staffers and managers know you, can play a big role in getting loan financing.”
2. Buy a used or certified used car.
Consider buying a used car or certified used car, since financing is typically more lenient for used cars, trucks and SUV’s. The risk of losing big money is reduced for financiers who don’t have to account for off-the-lot depreciation of the car’s value, making it easier for you to get a loan with decent terms.
3. Make a good-sized car loan down payment.
If you can make even a 25 percent car down payment in upfront cash, that dramatically improves your odds of getting a good financing deal. Selling your own car or truck and using the proceeds toward the down payment can be a big help in that regard.
4. Shop around for pre-approved auto financing.
This tip comes from Edmunds.com, which acknowledges that a bad credit score means a higher auto loan rate could be inevitable. But if you check around with lenders and get pre-approved for an auto loan, you might find a lender that’s willing and able to offer a better rate deal, especially if you come to the table with a larger down payment.
5. Bring proof of income and payment history.
Bringing some ‘value’ paperwork to a meeting with an auto loan financier can bolster your case. Some documents to consider providing include two of your most recent pay stubs and a copy of your tax returns, if you make a good income but are getting tripped up by some bad credit history. It can also help to show paid receipts of on-time mortgage and rental payments, which are big dollar-value payments that are held in higher regard by creditors and auto loan dealers.
Having bad credit does put you in the back of the line for a good auto loan deal. But you can get ahead by being prepared, being creative, and canvassing as many lenders as you can with as much good paperwork as you have.