Bad credit can make it difficult to buy a car from a traditional dealership. However, car dealerships with bad credit can help you get a loan and get approved. These dealerships typically charge higher interest rates and fees, and they may not report your payments to credit bureaus.
It’s best to compare the rates and fees offered by the car dealership with bad credit with those offered by banks and credit unions to make sure you’re getting the best deal.
How Bad Credit Car Dealerships Work
Buying a car through a car dealership with bad credit is much like buying from any other dealership. The only difference is that you might have a harder time finding a competitive interest rate. But, like a traditional dealership, you’ll walk away with a new car – or new to you – and a loan to pay off.
Because you have a less than ideal credit score, you will be offered a higher interest rate than a customer with good credit. The dealer will also charge a commission, which will usually be added to the interest rate offered.
Bad credit car dealerships may still require a credit check, depending on which type you are going with. Prepare to have your report re-investigated by pre-screening all the places you might want to apply to keep your shopping window tight and avoid multiple results to your credit.
Financing offered by bad credit car dealerships
Many bad credit car dealerships will finance a car regardless of your credit. Yet your options are limited. Some dealerships may charge extra for the finance option or take a higher commission.
Buy here, pay here resellers
You may also be placed in a financing program that does not report your payments to one of the three major credit bureaus – Experian, Equifax or TransUnion. This is more common with “buy here, pay here” (BHPH) dealerships. At a BHPH dealership, you may be offered a loan without a credit check, but you will only have the choice of used cars and there will be other eligibility criteria that you will need to meet.
Subprime auto lenders
Other dealerships simply work with subprime lenders to provide financing for borrowers with bad credit. These lenders may or may not report to the credit bureaus. If you’re not sure, ask. Having a car loan can be a great way to boost your credit — as long as you keep paying — but it won’t be if it’s not reported.
Whichever option you choose, it’s best to compare the rates and fees offered with what you’d get from a bank or credit union on your own to make sure you’re getting the best deal. .
How to get the best deal from a car dealership with bad credit
To get the best deal, think about your needs well before you arrive. If you know you want a specific car, it may be best to buy local inventory online when doing your research. You’ll have a better chance of knowing your options and the cars you’d like to drive. Pay attention to the sales process and avoid impulse purchases that you may regret later.
Determine your budget
Determining your budget is a crucial step in the car buying journey. Figure out how much you can afford monthly, including other bills and expenses you have, and subtract the amount you need to spend on other debts, such as student loans or credit cards.
Also keep in mind that financing is only part of the cost of owning a car. You also need to factor insurance, gas, maintenance and license fees into your budget.
Before heading to the dealership, contact banks, credit unions, and online lenders who may offer pre-approval for auto loans. The dealership will likely offer you a car loan, but outside lenders may offer you better rates and terms if you can qualify.
Most of the time, used car dealerships work with the same lenders that offer car loans directly to consumers. In this case, you may be prequalified for the same loan that the dealership would offer, but without the dealership markup.
Compare the prices
Even if you get pre-approved with what seems like a decent rate, don’t go for the first loan offer you get. Shop around to see if you can get a better rate elsewhere. Just keep your purchases within two weeks to avoid multiple hits to your credit.
Alternatives to using a car dealership with bad credit
Car dealerships aren’t always the best route to take when buying a vehicle, even a used one, if your credit isn’t in top shape. There are many other ways to get a vehicle if you have bad credit, including:
- Direct lenders. These lenders have online platforms that offer direct applications to people with poor credit.
- Credit unions. Many credit unions have more lenient loan requirements than banks and offer special financing to their members.
- Get a co-signer. A co-signer is someone with very good to excellent credit – usually 740 or more – who guarantees repayment of the loan if you can’t. A lender may see you as less risky with a co-signer and offer a better rate because of it.
- Improve your credit. If you can put off buying a vehicle, it might be worth taking the time to pay off other debts and improve your credit before buying a car.
- Save. This is another option if you are not in a rush to buy now. If you can save for a cheaper used car, you may be able to forego financing altogether.
The bottom line
Bad credit car dealerships may be able to help you get a loan and get approved, but they may not be the most reliable option when it comes to finding the best deal. Before heading to a dealership with bad credit, research car loan rates with your local credit union and other lenders to see if you can get a better deal.