Car shopping is a harrowing endeavor for anyone, but if your credit score has taken a beating and you're in the "poor" category with a low score, it's even more challenging. You might find some solace by looking away from new cars and aiming for used. Now that the current supply chain problem has improved, used car prices are coming down and that's a very good thing after three years of high prices. Looking for a good used car gives you more vehicle choices and opens opportunities to get a decent auto loan rate or, better yet, purchase a car with cash in hand. Even with challenging credit, you have options.
Everybody loves new cars but does not necessarily love new car prices. Now that things have calmed down a bit, you can find a good deal on a used vehicle. Buying a used car when you have bad credit is easier on the bank account because of its lower average price. Consider a 2023 Honda Accord. The base price is $27,295 before destination and delivery. If you buy one that's five years older, that 2018 Accord costs around $20,000, a substantial difference.
New cars can depreciate by as much as 20% as soon as you drive off the lot, followed by a 10% drop over the next two years. One of the major advantages of buying used is that most of the depreciation has been shouldered by the first owner. Your monthly payment, as a result, will be lower.
The average new car price has dropped from over $50k last year to $48,008, which is good news. But that's still way high for many would-be car shoppers, and that's where buying used will offer more options. You'll have to borrow less money to fund your purchase, and lenders will be more willing to loan you the money, as a result.
If you happen to have subprime credit (580-619), your shopping process looks different than those with prime (660-719) or super-prime (720+). You must see how much you qualify for before you start shopping, versus the other way around. You'll have to go to a dealership and submit a credit application for them to send to subprime lenders for review. The subprime lender that agrees to approve your auto loan will provide a maximum monthly payment allowed, and you'll shop based on that.
The good news is that the car dealership isn't your only option to finance a used car when you have bad credit. Other choices include credit unions, Buy-Here-Pay-Here dealerships, and even subprime lenders who advertise on the internet, but you need to beware before you proceed with any of these choices. There are ups and downs to each one.
Credit unions are great because they're usually non-profit, by definition and willing to work with you as a result. More good news comes in the form of lower interest rates from credit unions. There are, however, limitations. You can't go to just any credit union because there are membership qualifications. You may need to fall within a specific consumer or occupational group to become a member, so do your homework before you try to apply.
Buy-Here-Pay-Here dealerships are commonplace, and they typically will accept about any credit level. That's the good news. The bad news is that they can be predatory and try to push a high-interest loan on you by disguising it with low monthly payments over a very long term. This is something you need to be aware of. They can also impose restrictions on payment terms and penalize you severely when you don't comply. won't turn down car shoppers based on a low credit score, but they typically come with high interest rates and restrictive payment terms.
If you happen to look for a subprime auto lender on the internet, the options are greater. They do offer second-chance car loans and provide a tremendous amount of flexibility when it comes to loan approval. The downside is that they tend to impose high interest rates which results in higher monthly payments. They will run your credit score and consider your income level, so be aware.
The lower price of a used car can be deceptive. Sure, you see that you'll save thousands when choosing a slightly used car over a brand new one, but the final amount that you end up paying could be staggering due to high interest rates. You need to do the math, especially if you have bad credit. A for-profit lender, especially one that will make a lot of money off your business, will typically show you the low monthly payment but won't emphasize the term of the loan. Consider the fact that the average loan period currently stands at a whopping 72 months. That's six years. If you subscribe to this loan term, it's likely that your car will have depreciated so much that you owe more on it than it's worth just a couple of years into the loan. That's called upside down, and you don't want to be in that position.
Finally, you can pay for a car in cash. In cases like this, it's unlikely that you have $20,000 sitting around, so you'll have to settle for an older vehicle that costs much less. But the advantage is that you owe nothing to anyone, and you pay zero interest. You also have more shopping options because you can buy from a private seller more easily when you have cash in hand, but the swath of available older vehicles will be narrower. You may also need to set aside money for repairs since the car will be significantly older if you don't have sufficient funds to buy one that's "less" used.
At the end of the day, just be wise about purchasing used when you have less than stellar credit. Since you can't just get a loan from anywhere you want, you'll have to be more selective about your options and be mindful of the fine print when it comes to interest rates, loan terms, and payment restrictions. Capitalize on the lower used car price by shopping for the best loan term and interest rate you can get, and make sure your monthly payment falls into your budget.