Save up for a sizable down payment
The most important factor in getting a car loan, regardless of your credit, is to finance the least amount of money possible. The less you need to borrow for your car, the less you will end up paying for that car over the life of the loan. Aim to save 20% for a down payment on a new vehicle and 10% for a down payment on a used vehicle. If you secure a loan with no money down, it means you’re financing the entire cost of the vehicle.
A solid down payment is also a good idea if you have bad credit because it’s a smaller risk for the lender and shows that you’re working to improve your finances. Lenders review your credit score to determine your credit risk. Visit my free credit report to see how you can get a free copy of your credit report.
Credit scores range from 300 to 850, and one of the most well-known is called a FICO score. A good FICO score is generally considered to be anything above 670.
- If your score is 740-799, you’ll likely get lower rates on loans from lenders
- if your FICO score is 580-669, you are considered to be a subprime borrower and may get a higher interest rate on your car loan, making the car cost more over time.
- If your FICO score is 300-579, you may have difficulty getting approved for a loan.
In addition to your credit score, your debt to income ratio (DTI) can be a significant factor for lenders, especially on large purchases like a car or home. This important financial figure expresses the amount of debt you have in relation to your overall income.
It’s calculated by dividing your total monthly debt by your gross monthly income. In general, the lower your DTI, the more attractive you are to lenders. Also, the less debt you take on through a potential loan, the lower your DTI will be and the more likely you are to be approved for your car loan.
Consider trading in your current vehicle
If you can’t afford a down payment, a trade-in could help you get a better loan. If you are replacing an older car, research your car’s value before you go to a dealership. Kelley Blue Book and Edmunds are good sources for determining the value of your trade-in.
If a dealer won’t give you a fair trade-in value, consider selling it yourself on eBay, Craigslist, or even Facebook. Ask for payment in cash or a banker’s draft to avoid scams. Then, use that money as a down payment on your new vehicle.