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How to secure a car loan with bad credit

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How to secure a car loan with bad credit

It’s always exciting when you start earning your first real paycheque. All of a sudden you have the resources to be financially independent and, finally, start looking at financing options for a car of your own. But it’s not always as simple as merely being able to afford the expense.

Everyone has a credit score determined by a variety of factors. Depending on your financial habits, you might be sitting with a bad credit history and score that will make it difficult to secure a car loan. But it’s not impossible.

 

What is “bad credit”?

Your credit history is deemed “bad” when you’ve failed to manage and pay off your debts on time. Loans, credit cards and other debt payments fall onto your credit history. And the manner in which you fail or comply to pay them off will affect your credit score.

The problem with a bad credit score is that you’re not a favourable client in the eyes of a lender which, as you can imagine, doesn’t make your car loan application a positive one. When you have bad credit, the lender institution either risks not having their loan repaid by you or they simply decline your car loan application for the auction car you wanted to buy.  

With bad credit, there aren’t many large financial endeavours you’ll be able to undertake. However, sometimes, bad credit isn’t purposeful on your part. You might just be breaking into the credit world with your first credit card and not yet had the chance to build up a history. Which also makes you an unfavourable client as you haven’t proved your ability to handle debt.

But, luckily, there are a few financial institutions that will approve a “bad credit applicant”. Not without a few compromises, however, but at least you’ll be able to attend the car auctions with a financing plan.  

 

Car loan options for bad credit

For those who find themselves with bad credit or who haven’t had the chance to build their credit score, these are some of your car loan options. Have the car calculator at hand and prepare to start financing a dream car you know you can afford. Keep in mind that pre-approved car finance will be in your favour when heading to the car dealership.   

  • Higher interest rate: Some lenders will still offer you the car loan, but you can expect the interest rate to be high. If you use the car instalment calculator, it could make the car you’re buying more expensive than it’s worth, so be sure to work it out before you accept.
  • Cosigner or co-borrower: You can choose to use a close friend or family members’ favourable credit score on your application and bring them on as a cosigner or co-borrower. Cosigners are responsible for taking over the payments should you fail pay monthly and their credit history will be affected by your repayment activities. But, at the end of the loan term with a cosigner, the vehicle is yours. A co-borrower is equally responsible for loan repayments and becomes an equal owner of the vehicle when the car is paid off.
  • Large down payment: When you place a large down payment on a vehicle, you’re automatically decreasing the loan amount needed which will make your loan term more affordable and the lender more likely to accept your application.

 

How to improve your credit score

For the wellbeing of your credit history’s future, there are a few ways you can build and improve your credit score.

  • Pay your debts: The simplest way to improve your credit score is to pay your debts on time. If you miss a payment or don’t pay altogether, you’re looking for a bad credit history and probably shouldn’t have put yourself in debt in the first place if you weren’t ready to make the monthly payments.
  • Bulk payments: When paying off your debts and credit cards, there’s usually a minimum payment amount that can be made every month that will guarantee the debt is paid for in full (plus interest) but the end of the settlement period. And while that is an option to help you afford your debt, you should start making bulk payments to pay it off quicker, pay less on interest and be debt-free sooner. It will reflect kindly on your credit history to do so.  
  • A mix of credit: You can also improve your credit score by having a mix of credit on your credit history statement. What this means is that you should have different types of credit debt that you actively manage and pay off. For example, a mix of handled store accounts, loans, credit cards and service contracts on your credit history will improve your score.   

Keep your eye on the car auction sites and start taking the necessary steps to improve your credit score and secure financing. You’re about to become a vehicle owner.

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