When you are shopping for a new car or truck, most finance experts suggest that you get pre-approved for an auto loan before you select a car.
But is this car financing advice relevant for people with all types of credit, even bad credit?
We asked industry experts to help us understand the auto loan pre-approval process as it applies to consumers with less-than-perfect or downright bad ratings with the credit bureaus. When you finish this article, you will better understand how the pre-approval process works and how it benefits you if you have bad credit.
While bad credit consumers definitely can seek pre-approval for their vehicle purchase, they won’t be successful with every traditional lending institution. Most big banks and nationwide lenders have a minimum credit score as part of their lending requirements. Much of the time you need to have good credit or better to get a good rate to buy a car with these big lending contenders.
"There are a number of auto lenders that provide pre-approvals with bad credit," explains Chane Steiner, CEO of Crediful. Car buyers with poor credit history will need to check if they can get a pre-approved car loan from one of these specialty companies by filling out an online application.
In addition, Vincent explains, "Many lenders, especially small banks and credit unions, have special programs to help borrowers with damaged credit get back on their feet."
These may not be big-name financial institutions, but there are well-reputed, smaller lending institutions as well as online lenders that specialize in car loans for people with subprime credit. Although, it won't be the best loan terms available. "Your interest rate will be higher than someone with better credit," says Steiner, "However, it is possible [to get pre-approved with bad credit]."
"You can expect to pay more for a loan if your credit isn’t good — as much as three times the rate that someone with excellent credit might pay," says Vincent.
“The worse your credit is, the more important it is to compare your rate options,” explains Sonia Steinway, CEO of Outside Financial. “Rates (and rates of approvals) can vary wildly from lender to lender, depending on how they make their underwriting decisions. Getting a pre-approval helps shopping in a few ways:
First, it can help you set your budget. If you know you can only afford a certain amount per month and a certain down payment, getting pre-approved will help you figure out the max you can pay for your vehicle.
Second, only loans outside the dealership avoid the dealer’s markups and fees. We calculate that the average dealer markup on a new car loan and related products is nearly $1,800 — more than dealers make on selling you a car!
Third, getting pre-approved sets a rate for negotiating with the dealer. If they’re able to match or get you a better rate than you bring from outside, you can take it knowing you’re getting the right deal for you. Just make sure the dealer is actually matching your pre-approved offer and not stretching out a larger loan amount by increasing the loan term or giving you a lower APR but packing in ancillary products at inflated prices.”
Have you ever gone to the store to buy something, spent quite a while picking it out and falling in love with it, only to realize that you forgot your wallet, don't have enough cash, or your card is declined when you get to the checkout?
That feeling is the worst, but we’ve all been there.
"Acquiring a reasonable loan is more difficult for [people with bad credit], says Mike Todaro, Sales Manager at Matt Blatt Kia of Toms River. He adds, "Getting a pre-approval beforehand will save you wasted time at a dealer."
It will also save you from that dejected feeling we talked about before. Todaro illustrates what he means about wasted time with this example:
"Tim has a 438 credit score, is looking at a Kia Sorento ($27,000 SUV), and doesn't have pre-approval. He'd gone through test drives and ultimately spend his whole day finding the perfect SUV. When it comes time for securing financing, he gets denied for a loan of that amount. Tim leaves and tries another dealership, only to have the same events occur. This situation is frustrating and makes the car buying experience unpleasant and unnecessarily time-consuming. With a pre-approval, Tim would know that if he did find his perfect vehicle, he'll be taking it home."
"By getting a pre-approved loan," explains Vincent "you’ll have a good idea what kind of car fits into your budget, given the interest rate you qualify for. Better to know what cars you can afford, rather than falling in love with a car and then struggling to figure out a way to pay for it."
You will save time and save yourself from heartbreak after spending a whole day falling in love, only to have your loan application for in-house financing denied.
"Pre-approvals mainly benefit people with bad credit or no down payments," advises Todaro.
It helps shoppers know what they can afford.
"Having a pre-approval before shopping for a car sets up a range of what you'll be able to buy," explains Todaro. "Your options and criteria are available to you before you get your mind set on a vehicle." This will save you from the wasted time and heartbreak that "Tim" experienced.
"[I]t's even more important," Steinway adds, “for consumers with bad credit to seek car loan pre-approval because those borrowers are particularly vulnerable to getting a bad deal at the dealership. Some lenders specialize in working with borrowers with bad credit or with limited credit histories."
If you think about it, auto loans are available from banks, credit unions, online lenders, and lastly, from a dealership's in-house financing or contracted lending partners, which may be limited as to what they can approve if you have a bad FICO credit score. With a dealership financing, your last step of the day, after checking out all the cars, is to see if you can get approved. Why not see what your options are before heading out?
Online, you can check with a variety of websites to see what kind of rates and terms you would likely qualify for, all with a soft credit check.
Be warned: "It's an unfortunate truth that some unscrupulous dealers in the marketplace prey on consumers with bad credit," advises Vincent. "They have no problem putting people into extremely costly loans, or they have no chance of paying back. Having a pre-approved loan helps you avoid these tactics."
It is harder for people with a bad credit rating to get the green stamp of pre-approval for their car purchase, but it is worth it.
This may be hard to hear, but it is the truth. You will have a harder time getting pre-approved, than someone with good credit.
"If you get denied for a pre-approval," says Todaro, "try to come up with some money to put down, find a cosigner, or take time to rebuild your credit."
"Why?" he asks. "With money down, the amount needed to borrow will be lower and result in a higher likelihood of an approval. With a cosigner, there are now two people liable for the money borrowed which means the lender has more insurance."
Your next steps will be to take some time to reestablish your credit or improve your credit. "If that's the case," Tony Arevalo, from Carsurance, also suggests, "consider improving your credit score by paying off existing debt, paying bills on time, and avoiding new applications until your credit score is improved."
"Over time," explains Todaro, "your credit will increase and a pre-approval and new car will be possible!"
"If you don't have time to wait for that," suggests Arevalo, "you can also apply for a loan from the car dealership. But, be aware that the interest rates at a dealership are much higher than at a money lending institution."
If you do go that route, you may want to see if you can get pre-approved through the dealership’s in-house financing online, before making "Tim's" mistakes. You need a budget before you shop, or you may be wasting your time.
No matter your credit situation, getting pre-approved for a loan has benefits. Even if you have a bad track record with the major credit bureaus, you should still try to pre-approved. This process gives you options and helps you know what monthly payment you can afford, whether you have good credit or not.