In this post, we will guide you on how to get a car loan even if you have bad credit.
Requirements for qualifying for car finance
To be eligible for applying for a car loan, you must be
- Eighteen years of age
- An Australian citizen or a permanent resident
- Employed and earning enough income with which you can repay the loan.
How to get a car loan with bad credit
Getting a car loan when you have bad credit can be challenging but isn’t impossible. However, you should be prepared for high interest rates, high fees, and penalties, amongst other potentially strict loan terms. To make the process easier, the following are the steps you should take to help you get your new car sooner, even with bad credit.
1. Create a budget
Before applying for a car loan, you should create a budget to find out exactly how much spare cash you have each month to spend on repaying a loan. This will help you to work out the amount of loan you need and how much you can afford to repay each month. Since you already have bad credit, it becomes increasingly important to manage your finances after you have taken a new loan so that your bad credit doesn’t get worse should you be late or miss a payment.
To find out the amount of loan you need to take, you need to deduct your monthly expenses from your monthly income to determine if you have a surplus or deficit of funds each month. If you already have some savings in your account, you need to subtract it from the price of the new car to find out the loan amount you need.
Divide the total loan amount by the number of months of your loan term to calculate the monthly repayment amount. If you can save much more than the monthly repayment amount each month, you can proceed with the car loan application.
Don’t forget to include any fees and costs that are either one-off such as such as stamp duty, or on-going like rego, comprehensive car insurance, roadside assistance, servicing and maintenance, petrol, tolls and parking, in your budget.
2. Know your credit score
If you have bad credit, your credit score will likely be below 500. The lower your score, the harder it will be for you to get a loan. While many bad credit lenders might be willing to give you loans, they will give you loans at exorbitant interest rates and strict loan terms. So, if you want to get a loan at better terms, you may consider waiting for some time and working on improving your credit score.
3. Do your research about the car you want
Before formally applying for a car loan, you need to do your research about the car you want to get. You can narrow down your choices and determine your price range for financing a car. This will allow you to have a clear idea about how much you need to borrow, your monthly repayment, and whether or not you can afford the loan repayments. If you have bad credit, your lender might restrict you to newer vehicles. This is because lenders are more likely to be able to recoup all their losses by repossessing and selling the vehicle should you default on the loan.
4. Compare different car loans
Rather than just going with the first loan offered I encourage you to compare loans offered by different lenders to ensure you’re getting the best loan terms possible. For example, you can compare interest rates on loans by comparing lenders’ advertised rates as well as comparison rates. You should also fully understand the types of fees (application processing fees, early exit fees, monthly fees) lenders usually charge.
5. Get your paperwork ready
Here is the list of the documents you should have on hand before applying for a car loan. The list is not exhaustive, and the requirements may vary from lender to lender.
- Proof of identity (identification card, passport, or driver’s license)
- Proof of income (such as pay slips)
- Bank statements
- Proof of assets (such as investments)
- Liabilities (i.e. mortgage, other loans)
- Information about your car insurance (some lenders require you to show proof of comprehensive car insurance)
- Information about your car (contract of sale, vehicle details such as model, make, chassis number, vehicle registration information, and the vehicle’s year of manufacture.)
Many lenders have online platforms that allow you to upload scanned images of your documents.
6. Apply for pre-approval
You can apply for pre-approval of your car loan. Pre-approval means that a lender, in principle, agrees to give you a loan of a certain amount while giving you the option to refuse the offer if you don’t find it suitable. If you get pre-approved for a car loan, the lender will state the loan amount you are likely to get once the loan is formally approved. This allows you to confidently look for a car with a particular budget or price range in mind.
You should remember that getting pre-approval for the loan is not a guarantee that your application for a car loan will be approved. Lenders usually make a more detailed assessment of your financial situation and your ability to repay before making a final decision about your loan application. However, assuming you have provided accurate information your chances of securing a loan after pre-approval are usually quite high.
7. Apply for full loan approval
After getting pre-approval and finalising your choice of car, you can apply for full loan approval. You should ensure that the vehicle you choose qualifies for the car loan you are applying for. The vehicle’s model, age, mileage, and other parameters should meet the criteria set by the lender. If you have bad credit, the lender might ask for additional documentation, such as tax records or extended bank statements.
Full loan approval requires a lot of paperwork, so you should keep your documents ready with you. To speed up your application process, it is recommended that you provide the lender with all the necessary documents as quickly as possible.
Getting a car loan with bad credit is possible, but you should be prepared for high-interest rates, high fees, and penalties, among other strict loan terms. Even if you are denied a car loan by large banks, various non-bank organizations that specialise in bad credit loans might be willing to give you a car loan. You need to apply for pre-approval, compare different car loan providers, choose your desired car, and then apply for full loan approval. The application process is quite easy if you have all the documents required by lenders.