It’s always preferable to enter a negotiation with the strongest possible hand, but having bad credit can sometimes make that difficult to do. Does that mean you can’t get a good deal when trying to buy a car? Not necessarily. Here’s how to work with car dealers that accept bad credit.
Know the Difference Between Franchise and Independent Car Dealerships
There are two main types of car dealerships: Franchise dealerships and independent dealerships. If you’ve ever seen a Toyota or Ford sign along the highway, you’re already familiar with franchise dealerships. They sell only specific makes of new vehicles and they often offer financing only through that manufacturer’s financing arm. Franchise dealerships often have associated used car sales as well, and offer a wide range of makes and models.
Independent car dealerships, on the other hand, typically sell used cars from a variety of different car makers. Whereas franchise dealerships typically finance cars with specific financial institutions (many of them in-house), independent used car dealerships often have a variety of financing options. No matter where you’re buying, it’s important to pay close attention to the fine print when financing.
Edmunds offers a great breakdown of the various types of used car lots if you’d like more information.
Where to Find Financing If You Have Bad Credit
Although there are independent used car dealerships that specifically cater to those with bad credit, they aren’t necessarily your only option. We spoke with Ronald Montoya, senior consumer advice editor at Edmunds, and he said that “most major dealerships are prepared to deal with customers who have bad credit, as it is a fairly common occurrence.”
You can save yourself some time, he adds, by calling the dealerships you’re interested in working with and asking to speak with a finance office employee. If you explain your situation to them, they might be able to let you know if they can work with you before you go all the way out to their dealership.
Buying a new car? See if your credit is in good shape with Upturn Credit’s free tool!
What to Know About Financing With Bad Credit
Just because you might buy a car through a franchise or independent dealership, you don’t necessarily have to finance through one. In fact, if you do, Montoya says you can expect high interest rates on used cars. “On average,” Montoya explains, interest rates “were already 8.6 percent in July of 2019, which means that those with bad credit can easily expect to see rates in the mid- to high-teens.”
Due to that, Montoya adds that it’s important to shop around for the best deal you can get, even if your credit isn’t the best. To do that, Montoya recommends getting pre-approved for a loan before you go to the car dealership. “This will give you a better idea of your price range and also give you a basis of comparison to the interest rate,” he said.
If you have bad credit and you’re offered a better APR, there are still red flags to watch out for in the financing process, especially at used car lots that advertise financing for people with bad credit. Here are just a few to be mindful of:
- Yo-Yo Financing: When you’re encouraged to take the car home without fully filling out a contract (or filling it out conditionally), and they suddenly tell you that you have to agree to a new (typically higher) interest rate — or else they might repossess the car.
- Buy Here, Pay Here Financing: In this sort of deal, your payments don’t always get reported to credit reporting bureaus (which means they can’t help improve your credit); the APRs might also be higher than they would be with traditional auto loans.
- Hidden fees and add-on products: Watch out for hidden fees in the fine print on your paperwork as well as sellers who try to convince you to add products that you might not need or want, such as gap insurance or extended warranties.
The more you know ahead of time, the better. Montoya recommends researching the market value of the car or cars you’re thinking of buying and paying close attention to the numbers going into the deal. If you’re not sure what a certain fee is for, he says, you should ask.
Finally, he concludes, “When in doubt, don’t be afraid to walk away.”
How To Get the Best Deal on a Car
The APR you get on a loan is important, but Montoya points out that there are other things that impact the total price as well:
“A good deal is more than just financing. There’s also the trade-in and the selling price of the vehicle to consider,” he said. “You should negotiate those separately to better keep track of all aspects of the deal.”
The more you get for your trade-in, the more value you can contribute to your new car. Montoya also recommends making a large down payment if you can, both to increase your chances of getting approved and to reduce your finance charges. However, he also recommends finding a dollar amount you can save for that won’t impact your emergency savings.
When you get to the financing part of the deal, be aware that you might have to pay a higher APR with a shorter repayment time frame than someone with better credit would. An article in U.S. News explains that this is what responsible lenders would do. The article goes on to say that if a lender offers a loan that will take seven or eight years to repay or lets you roll an existing auto loan balance into a new loan, they might not be working in your best interest:
“Such loans can bury you in debt and leave you with a significant amount of money to pay back even if you wreck the car or it is totaled. Any time the balance of the loan is higher than the cash value of the vehicle, you are considered to be upside-down or underwater on the loan.”
Their recommendation is to use an auto loan calculator. Find out the monthly payment, multiply it by the number of months in the loan, and add that total to your down payment as well as the trade-in value. This will show you the total cost of the car, which you can then compare to the car’s market value.
These numbers can let you know if you’re being offered a good deal. And, if not, remember that there are plenty of reputable franchise and independent dealerships out there, so there’s no reason to force yourself into a deal you’re wary of.