Overcoming Credit Issues

When you apply for financing for your new car, you will fall into one of three categories.

Less than perfect credit
Little or no credit
Good credit

Chances are as a new car buyer, you may not have much of a credit history that lenders can use to base their decision on. While some lenders are willing to take a chance on you, others will not.

Less Than Perfect Credit

If your credit is not perfect, you may have trouble qualifying for a car loans. This can be very frustrating, especially if you found the perfect car. Credit issues can range from missed credit card payments, missed mortgage payments, missed student loan payments, and other loan payments. Credit issues are not uncommon. Banks and other lending institutions can work with you if you have minor credit issues. There are several options for you if you have less than perfect credit:

Decrease time of loan repayment
Increase down payment
Find other lenders who will approve loan
Agree to higher interest rate
Find a lower priced car

You should obtain a copy of your credit report before applying for car loans. This report will give a better idea of what lenders will be looking for when they check your credit. This will prepare you for higher interest rates or rejection of a car loan. However, there are many lenders who will grant loans to those whose credit is not perfect.

Decrease time of loan repayment: If you can lower the repayment time of the car loan, you may be able to be approved for the loan. Decreasing the time increases the payments. This can sometimes be enough to reassure lenders that they will get their money back. Check your proposed budget to see how much more you can afford.

Increase down payment: If you increase your down payment, you will be able to decrease the amount of the car loan. If a bank does not have to lend you as much money, they may be willing to grant you the loan. Increasing your down payment is a show of good faith in the eyes of many lenders.

Find other lenders who will approve loan: You can apply for a loan with other lenders. Trying a dealership that works with many banks is oftentimes the best way to be approved for a loan if you have credit issues.

Agree to a higher interest rate: Many times a lender will approve a car loan to those with less than perfect credit, but they will offer the loan at a higher interest rate. If you think you can afford it, take the higher rate. You will be repairing your credit by paying off this new loan.

Find a lower priced car: If all else fails, you should try to find a car that does not cost as much. Ask the salesperson at the dealership if they have cars that are more affordable. Sometimes if you cut back on extra features in a car, the price will drop considerably.

Little or No Credit

Sometimes having no credit can be even worse that having less than perfect credit. Since you do not have much of a credit history, lenders will have a difficult time deciding whether you are capable of paying off a new car loan. There are several things that can happen when you do not have long credit history:

Loan denial
Pay higher interest rate
Approved for another loan amount
Choose another loan term

While these outcomes are not always fair, once you are approved for a car loan and you pay it off successfully, you will be able to qualify for other loans. After successful repayment, you will be offered a better interest rate, loan terms, and loan amount the next time you buy a car.

People with little or no credit include students, people who have filed for bankruptcy, and people who are recently divorced. Building credit can take a few years. You should pay all of your bills on time and not miss any payments. Many people start out with a credit card and then move on to a car loan. Many dealerships have banks that are willing to give loans to those who have little or no credit.

If this is your first major loan, you may need a co-signer, which is a person who will sign the loan with you and agree to make car payments if you cannot. For those with no credit, this may be your only option. The person you pick should have good credit in order to be considered a suitable co-signer.

Good Credit

If you have good credit, you may still have problems finding a car loan. Since most banks require that you spend less than 60% of your annual income on bills and other expenses to qualify for a loan, if you have good credit, but have credit card bills, mortgage, and other bills to pay, the bank many not approve your loan.

Good credit is only one factor that lenders look at when they are evaluating your loan application. Your income and other expenses are taken into consideration. The best way to get approved for a loan is to go through a dealership.