While most American households cannot comfortably afford the cost of a new vehicle, this does not in any way reduce their need for the independence and freedom of movement offered by owning an automobile. But with the high cost of living and poverty rates ever-increasing, words like bad credit may feel like the final nail in the coffin that is never owning a car. This, however, does not need to be true. Having poor credit scores and no money to pay a deposit does not need to stand in the way of your dream of achieving mobility independence. This article will help you in your goal of buying a car with bad credit and no money down.
Credit scores are perhaps the most widely used and important way of determining your financial health. But what exactly is a credit score and what is it used for? according to Wikipedia, a credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. This data is sourced by credit bureaus and is used by lenders such as banks and credit card companies to find out whether you are a high-risk customer and will affect the interest you pay and also your cheap full coverage auto insurance with no down payments.
General usage FICO scores which are the most widely used range from 300 to 850 and show your level of creditworthiness with 850 at the top end. Auto lenders use these scores as a future determiner on your reliability to make your monthly payments based on your past behavior and use it to set interest rates. As much as $99 car leases no money down sound attractive, this article will help you own your very own car even with bad credit.
The Comprehensive Guide On How To Increase Your Credit Score?
The importance of a good credit score in determining your financial health and in any future loan applications cannot be overstated. Even as this article guides you on how to get a car with bad credit, here are some ways to improve your credit score that can take some of the strain off your car shopping experience.
1. Review your credit report
The first step in rectifying any problem, is to first identify the problem. Request for a copy of your credit report from each of the three major national credit bureaus (Equifax, Transunion, and Experian) -which can be done for free once annually-review it and find out what’s leading to your poor score.
A better understanding of the risk factors that have the largest impact on your credit scores will help you make the necessary changes to improve your score.
2. Limit the number of hard inquiries
The two types of inquiries into your credit history are soft and hard inquiries/pulls. A soft inquiry occurs when a person or a company checks your credit as part of a background check such as when an employer runs a soft inquiry before making a hiring decision.
Other examples of soft inquiries include checking your credit scores and “Pre-qualified” credit card offers. Soft inquiries do not affect your credit score Hard inquiries on the other hand typically occur when a lender or credit card issuer checks your credit before making a lending decision and you have to authorize them.
A single hard inquiry is likely to have a negligible effect on your credit score but multiple hard inquiries in a short span negatively affect your credit score as you look like a high-risk customer getting ready to accumulate a lot of debt. Though their effect fade over time, hard inquiries remain on your credit report for two years
3. Credit Utilization Ratio
Your credit utilization ratio is a measure of how much of your total available credit is being utilized. It is calculated by adding all your credit card balances at any time and dividing that by total credit limit and it contributes around 30% to your FICO credit score.
Aim for a credit utilization ratio of 30% or lower as this shows that you know how to manage your credit. You can positively impact your credit utilization by paying off all your outstanding balances and even by requesting an increase in your credit limit without increasing your spending.
4. Pay your bills on time
How reliably you pay your bills makes up about 35% of your FICO credit score as they can be used as a predictor on how you are expected to pay your bills in the future. It is an area you need to look at critically if you are to have any hope of increasing your credit score.
Make sure you pay all your loans and utilities fully and on time and even earlier if you can. If you have a problem doing this, set reminders, and make use of automatic payments. Catch yourself up on any missed payments and continue the trend. Even if collection accounts stay on your report for seven years, their impact will reduce with time.
5. Correct any errors on your credit report
Review your credit reports from all three national credit bureaus and be keen to make sure you spot any inaccuracies or incorrect information that could be dragging down your credit scores. Make sure that all the hard inquiries listed occurred with your permission and that all the accounts are correct. Dispute any errors you see right away and get them corrected.
Other ways to increase your credit score is to keep your old accounts open to avoid reducing your credit limit and increasing your credit utilization ratio and to open new credit accounts only as needed. Using credit monitoring services could also be a great way to see how your credit score changes and to spot any possible inaccuracies and correct them.
Buy Or Lease? Which Option Will Be Better In The Long Run?
Even as your sights may be set on owning a new vehicle, you may want to take a step back and consider leasing a car instead of buying it and getting stuck with property of depreciating value. Here are some of the advantages and disadvantages of buying vs leasing to help you choose the best option for you.
Leasing a car
PROS
- Unlike when you buy a car, you can always switch up and upgrade your car in the middle of a lease. With improvements and upgrades on cars coming out faster than ever before, this is a big advantage.
- We would all like to use less of our money each month to make car payments and this is possible when you lease since generally, the monthly payments will be lower than for a bought car.
- If you are covered by your manufacturer’s warranty, you will incur little to no charges when you want to repair your vehicle. Cheap full coverage auto insurance companies like Progressive, Safe Auto, and Kemper will also offer you inexpensive full coverage insurance plans.
CONS
- Leased vehicles will often cost you more in the long run. This is because once your lease is up, you will return the vehicle and walk away with no equity. You will also keep making monthly payments for the duration of the lease unlike car payments which are finite.
- Penalties from leased cars for exceeding the agreed-upon mileage and excessive wear will increase your costs
Buying a car
PROS
- You will have no restrictions if you buy a car. You can rack up the vehicle’s mileage without paying heavy penalties for exceeding a prescribed amount or for any damage to the vehicle
- Buying a vehicle will generally cost you less in the long term as you can use any equity you build up towards purchasing another vehicle
- Since you are the owner of the car, you can sell your vehicle at whatever time you like which is not the case when leasing
CONS
- A car is still a depreciating asset and you will definitely get a lower resale value and the responsibility of reselling will be solely yours
- The monthly payments for a bought vehicle will generally be higher than the monthly payments for the cheapest cars to lease no money down. The cost of any repairs after the warranty expires will also fall on your shoulders.
The 5 Best Ways To Buy A Car With Bad Credit And No Money Down
1. Improve your credit
Lenders are more inclined to offer you better terms if you have a strong credit history and credit score. Credit scores of 740 or higher will get you the best interest rates on an auto loan with rates lower than 5% for the best credit scores.
If, on the other hand, you have a terrible credit score-lower than 580- you will most likely get extremely high interest rates of up to 30%. When you feel ready to purchase a car, take some time to review your credit score and research on ways to improve it before the actual purchase.
This can easily help you save thousands of dollars which you would have used with worse credit. Lenders, apart from looking at your credit score, will also consider other factors that are not in the FICO report such as your employment history and your income.
2. Make a down payment
If you don’t have any money for a down payment, waiting until you do may make the car purchase easier and be better for you in the long run. Apart from reducing the amount you owe in principal, other benefits of down payments include;
- A lower principal will reduce your monthly payments
- A lower principal will also reduce the amount of interest you pay. Given that buyers with bad credit are often charged with higher interest rates, this will go a long way in reducing the amount of interest you pay.
- Down payments may also work to give you a wider selection of vehicles to choose from. The good news is that the down payment may not be as huge as you had previously imagined. Car buyers made down payments that averaged at 11.7% in 2019 which was a departure from the traditional 20%.
3. Get a cosigner
A cosigner is a person with a higher credit score who will be responsible for making your car payments in case you are not able to fulfill your loan obligations and may be needed to make any missed payments or pay the loan amount in full.
Getting a cosigner can be a great way to finance your car at a reasonable interest rate to offset the high rates that come with bad credit and is sometimes a requirement from the lender. To avoid getting on the wrong side of your cosigner, choose this option only if you are confident that you can pay your monthly payments on time for the duration of the loan.
4. Go for a shorter loan period
It is easy to be tempted to go for a longer loan period so you can make lower monthly payments. Nevertheless, a shorter loan period which may seem strenuous at first look may help you lower the overall cost of the car since interest rates are generally lower for short-term loans than long term loans. Plus, it has the added advantage of giving you some extra years which are car loan-free.
5. Research
Bad credit and no money to make a down payment may make you feel like you have very limited options and you should jump at any deal-no matter how poor- you are offered. This could not be less true. Just because you have bad credit does not mean you can’t get a car loan.
Shop around and find out about the different rates offered by different lenders to avoid getting taken advantage of. Find out the lending rates for different lenders based on your credit score and use this information to choose a lender that works for you.
Final Thoughts
According to a recent Gallup poll among U.S. adults, 19% of the respondents said that they used motor vehicles multiple times weekly while 64% drove daily. As you work to improve your credit scores, you don’t need to suffer a loss of mobility that can leave you feeling helpless and frustrated and this article is aimed to help you with just that.