Know the terms. FHA loans are available to some first time home buyers who are purchasing single family homes or homes in small multifamily units. A buyer with a credit score above 580 will typically be eligible for a loan with only 3.5% of the purchase price as a down payment on the mortgage. Borrowers with scores between 579-500 are eligible for 90% financing (or a 10% down payment), and borrowers with credit scores below 500 are ineligible. Check your credit. Just as you would if you were buying a car, you should start by checking your credit. That way, you maximize your information and minimize the surprises. Therefore, check your credit score and get a copy of your credit report before you even start to visit with lenders. You can get a copy of your credit report at . You can get your credit score directly from the credit bureaus, or from sites like creditkarma.com or credit.com.
- As with applying for any loan, the more you can tweak your credit score to adjust it higher, the better. Try and establish a year's worth of on-time payments, reducing you credit utilization to 30% or less than your credit limit, and minimizing your applications for large lines of credit, like car loans.
Method 2Getting an Auto Loan
- Check your credit. You want to have as much information going into any transaction as you can. That way, you will be able to better evaluate any information that you counterpart in the transaction tells you. Therefore, check your credit score and get a copy of your credit report before you even start to visit with lenders. You can get a copy of your credit report at . You can get your credit score directly from the credit bureaus, or from sites like creditkarma.com or credit.com.
- Plan in advance. Try to make plans for your new car purchase several months in advance. That way, once you have read the information in your credit report and seen your credit score, you can take steps, such as making on-time payments and using less of your existing credit limits (try and keep it under 30%), to improve your credit score.
- Shop around. If you're buying a car, your bad credit may not be a terrible hindrance to getting a good loan because the term of the loan is short and the car itself is essentially collateral (it can be repossessed if you fail to make payments). Therefore, it is imperative that you shop around. The average borrower with bad credit pays 10-13% for an auto loan. If you’re paying much more than that, there’s an excellent chance that you can get a better deal elsewhere.
- Look at conventional lenders first. While a conventional lender, like a credit union or bank, might give a person with bad credit a higher interest rate than a person with good credit, they will often lend to borrowers with bad credit. Scrutinize lots that cater to people with bad credit carefully. Those are often the lenders with the least favorable terms to the borrower.
- Focus on finding the lowest APR (annual percentage rate)over the shortest term. Extending the length of your loan may be tempting because it reduces the amount of your monthly payments, but you end up paying more in interest in the long run. This goes double if you are buying a used car. If the term of the loan is too long, you can end up making monthly payments on a car that long ago ceased to be drivable.
- Watch out for non-essentials in your contract. Some lending contracts require the borrower to purchase extended warranties, after-market services and even insurance. If these have been added on to your contract, walk away.
- Read the fine print. Some dealers write up contingent or conditional contracts that allow them to increase the down payment or monthly payment of your loan. This type of term is extremely unfavorable to the borrower, and will almost certainly be used against a borrower as a pretext for repossessing the car. If a lender inserts this type of clause into the contract, run the other way.
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