Bad Credit No Longer Means Bad Car Loans

For many Americans having a car is about getting to work and supporting their families. They often work at more than one job and still struggle with a weak credit score or a thin credit file

Additionally, COVID-19 has had a severe effect on the market, driving many to take on gig economy jobs to supplement their incomes.  

In fact, one out of five adults is either unbanked or underbanked resulting in poor to no credit history at all. And since most consumers can't walk in and buy a car for cash, this makes the loan approval process the center of the car-buying experience.

It may seem a bit hopeless if a person has bad credit, but there's good news for people who need a little help. Alternative scores are creating second chances for consumers, particularly ones who are first-time buyers. So, if you need a car but have struggled with credit in the past, here are some tips to help you get started.

Know Your Credit Score Options 

Knowing where to turn for a score is important. Find out how alternative credit scores can help you hit a reset button when it comes to getting a loan. The important thing is to be proactive before you're sitting in a dealership negotiating a price. 

Unlike traditional credit scores, alternative credit refers to payment information associated with regular expenses such as phone, internet, and utility bills - as well as factors in subscriptions. This score will give you a better chance of getting a loan.

To get your alternative credit score check out Connect. We are a 100% free service which will not only give you your alternative credit score but will help you manage and organize your bills and accounts.

Sign up for an alternative score before you start shopping.


How to Approach the Car Buying Process

Next, put yourself in charge by finding out how much money you are willing to spend on a car. Be smart about how you negotiate and be clear about what you want. Upgrades make money for the dealership but having nothing to do with long-term value. It's always tempting to go for a car with more options (leather seats, aluminum wheels, etc.), but these options just drive up the price. Remember, you're in charge of the deal, and it's OK to say no to something that doesn't work for you. 

There are tools that will calculate how much you should pay, but the general rule of thumb is to invest no more than between 10% to 15% of your monthly income. Setting a budget before you start shopping will narrow your window of options (which is good) and help you close in on a deal that makes sense for you.

Know What Price to Pay

Doing a little homework upfront can ensure that you don't end up overpaying for a car even when the list price fits within your budget. Car dealers almost always will negotiate with you on the price you pay. If they don't, and you don't like the price, it's time to walk away and take your business elsewhere.  

Free pricing guides such as EdmundsKelley Blue Book, or NADA can help you understand what other consumers are paying for similar cars. You'd be surprised by how many factors are involved in determining the value. Low-mileage cars are something to look for because, most often, there is less wear and tear, which can lead to big repair bills down the road.  

Understand the Cost of Ownership

It isn't just about the price you pay, but also about whether or not the car is expensive to maintain. You don't want a fancy car that looks good but ends up sitting on the curb due to expensive repairs. Again, a little homework goes a long way. Use online resources to help you estimate the cost of ownership.  

Shop Around for Loan Options

You may think that you need to find someone who accepts an alternative credit score, but federal law is on your side. According to the Equal Credit Opportunity Act (ECOA), if you provide a lender with proof of nontraditional payment history (that's what an alternative credit score is!), they need to consider it in making a lending decision.  

Below are some options for getting a loan that is right for you.


Credit Unions:

If you are not keen on using a bank to finance your next car, you should find out if your employer allows you to join a credit union. Credit unions are well-established lenders, and their reputation ensures there is safety when taking out a loan.

Credit unions have a mission to offer competitive interest rates in the hopes that you will be a repeat customer. Of course, these lower interest rates come at a cost. It comes in the form of cross-collateralization. This will automatically connect your checking accounts with your auto loan. So, if you happen to miss a monthly payment, the credit union might take the money directly out of your account.


Buy Here Pay Here Dealerships (BHPH):

"Buy here, pay here" dealerships are also a viable option. Instead of using third-party lenders, these dealers act as a bank themselves and may be more willing to use an alternative credit score. This gives them more flexibility in who they are willing to approve for a loan, and they're often familiar with the needs of consumers who have had some bumps in the road when it comes to credit.  


Leasing a Car:

Over the past decade, leasing a car has become an increasingly popular option over financing a new car. A 2020 study found that nearly a third of new vehicles are leased rather than sold. This option usually appeals to consumers with lower credit scores who are looking for an alternative to taking out a loan. 

At the end of the day, it's essential to weigh the pros and cons of each of these options yourself. You'll find it's easier than you think once you get started on the right path. Just keep in mind that using alternative credit scores will help give you a second chance at getting an affordable loan that works best for you.

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