The Truth About Cars and Bad Credit

You just know you can’t get a new – well used – car. Your credit is in the tank and nobody will give you a loan. You’re stuck riding the bus to and from work every day and on the weekends to run your errands. Your frustration is maxed out because it’s not only a waste of money but also a time-suck. If you had a car, you’d be able to run your errands and do your grocery shopping in half the time it takes you now. Then, you could actually relax on the weekends. You can’t get a car with bad credit… or can you…

Take an Honest Look at Your Credit

Take a moment to run your credit from Equifax, Experian, and TransUnion. You are entitled to free reports from all three agencies once a year, and you want to look at all three of them because each agency reports your credit a little differently. Make certain there aren’t any mistakes on any of the reports. It’s possible your credit score has taken a nosedive due to reporting errors. If this is the case, file a claim with the agencies reporting the errors to have them corrected. Once the corrections are made, your score should bump up just a little, depending on how many errors you found.

Next, look at the black marks on your report. Have you fallen behind and/or missed credit card payments, your rent, and other financial obligations? If you have, all is not lost. Contact each creditor and discuss your situation with them. Explain what made you fall behind. Perhaps it was an unexpected layoff or salary cut; perhaps you were just irresponsible. Either way, be honest. The creditors want their money, so they should work with you to resolve the late balance. If they do, ask them to write you a letter stating you’ve discussed your account and are working to bring it up to date.

Take an Honest Look at Your Budget

Once you’re on the road to credit recovery, sit down and take an honest look at your budget. Calculate how much money you bring in each month after taxes – your net not gross pay. Then, calculate how much money you spend on bills and life. Consider everything, including food, fun, and savings. You want to make certain you can add a car to your expenses comfortably; otherwise, you’ll find yourself late on your car payments, too, which will further damage your credit score and future lending opportunities. Even if you’re getting a car online, it does you no good if you can’t really – really – afford it.

Many in the finance world say your car’s expenses should be no more than 10 to 20 percent of your gross pay, but this might be too liberal for your current financial situation. It’s better to err on the side of caution and ensure that you can afford car payments, gas, insurance, and maintenance, not to mention have a little set aside in case the car breaks down. Shoot for 10 percent of your income as a guide to play it safe. If you cannot afford to set aside that amount for your car expenses – all of them – then you might be better off to wait until you get a raise or have another source of additional income.

Get Ready for the Deal

If you can, it’s time to get ready for your new/used car purchase. First, take at least six months to clean up your credit per your agreements with your creditors. The longer you can show recent responsible action, the better. Then, avoid the temptation to buy anything else during this time. Don’t take out more credit or make any major purchases. This will increase your debt-to-income ratio, which is something car lenders look at. You want this number to work in your favor, i.e. you don’t have a high debt-to-income ratio. Finally, stash away as much money as you can for the down payment on the car during this time.

On the latter, the more the better should be your philosophy. The more you can put down for the automobile loan, the less your interest rate and lower your car payments. Keep in mind that even though you can buy a car with bad credit, you still want to be responsible with the transaction. Don’t repeat past mistakes and get yourself upside down in your car loan, too.