Money Girl reviews 3 ways to get a car loan with bad credit and how to build credit fast.
Heather from Ohio asks:
A friend of mine with bad credit is driving a car that was financed by her parents. She’s sending the monthly payment, but the car loan is in her parents’ names only. She doesn’t have any credit cards or other loans right now. If she refinances the car loan in her name will that help her build good credit?
In this episode we'll cover what you should know about how to get a car loan with bad credit and who can refinance one. Plus, I'll give you tips and resources to build a great credit score fast..
Why Building Good Credit Improves Personal Finances
Whether you like the idea of being judged by your credit history or not, having poor credit always hurts your finances. It can cause you to pay sky-high interest rates for loans and credit cards, or to be declined for new credit accounts altogether.
Even if you never borrow a dime, poor credit still catches up with you in other ways. For instance, insurance companies in most states use a credit-based insurance score to set rates for auto and home insurance. A study that I worked on for insuranceQuotes.com showed that consumers with poor credit can pay as much as double for car insurance compared to those with good credit. Yikes!
Additionally, having bad marks on your credit report can cause other problems. Your application could be turned down when you want to rent an apartment, get a new job, or qualify for certain government benefits.
Having bad credit doesn’t mean that you’re a bad person. It’s simply an indication that you have a thin credit file or have had financial troubles in the past.
No matter if poor credit is the result of having little credit history, mismanaging your finances, or being saddled with circumstances beyond your control, you can improve your credit scores over time. I’ll give you a great resource to help build credit at the end of this article.
Who Can Refinance a Car Loan?
First, let’s get back to Heather’s question about her friend, who we’ll call Jane. The car Jane pays for is financed by a loan in her parents’ name, not hers. You can refinance a loan only when it’s in your name, so that isn’t an option for her.
However, if you want to build credit, you must have credit accounts in your name and manage them responsibly. Therefore, a smart move for Jane would be to buy the car from her parents.
For example, let’s say the balance on the car loan is $10,000 and her parents are willing to sell it to her for that amount. Jane would get a new loan for $10,000 and pay it to her parents. They would use the money to pay off their loan and transfer the car’s title to Jane.
Now, both the car and the loan belong to Jane. The payments she makes on the loan will be added to her credit history. If she pays them on time each month, those positive transactions will really boost her credit.
Credit unions tend to be more forgiving of consumers who have less than perfect credit than traditional banks.
How to Get a Car Loan With Bad Credit
But wait a minute. How can Jane get a car loan with bad credit? After all, the reason her parents financed the car for her in the first place is probably because Jane couldn’t qualify for a loan on her own.
Well, here are 3 financing options, even when you don't have excellent credit:
Option #1: Credit Unions
A local or national credit union can be a great source for a car loan. Credit unions are similar to banks, but they require you to be a member in order to use their services.
Different credit unions have different membership requirements, such as working for a certain employer or living in a certain city. However, in some cases joining can be as simple as making a one-time $10 donation to a charity that the credit union supports.
Credit unions tend to be more forgiving of consumers who have less than perfect credit than traditional banks. They’re serious about serving members and may take a chance on you if you’re equally serious about repaying a car loan on time.
In addition to giving more personalized service, credit unions generally offer competitive interest rates that can save you money.
Option #2: Find a Co-Signer
If you can’t qualify for a car loan, consider finding someone with good credit to be your co-signer. Maybe a family member or friend who trusts you enough to share responsibility for a debt.
When you co-sign a loan, the payment history gets reported on both of your credit reports, even if only one co-signer makes the payments. That means if you make payments on time, it benefits both of your credit reports and helps increase both of your credit scores.
On the other hand, making late payments damages both of your credit files. And if you default, the lender will hold both of you equally responsible for repaying the debt.
Option #3: Peer-to-Peer Loans
A peer-to-peer loan is when you borrow money through an online platform from an individual instead of from a traditional financial institution. It’s also known as person-to-person lending, P2P lending, or social lending, and is growing in popularity.
You create a profile and post a loan listing that includes how much you want to borrow and what the money will be used for. Investors choose the opportunities that meet their criteria, and some will take a chance on borrowers with lower credit scores.
How to Raise Your Credit Score
If none of these 3 financing options works for you, the best way to qualify for a car loan is to focus on raising your credit score.
Also, check out a multimedia tutorial I created called the Credit Score Survival Kit. It’s a free download that includes a video, audio, and e-book that teaches you 3 smart and legitimate strategies to build excellent credit.
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