You find yourself in a bit of a tricky situation. You absolutely need a vehicle, but your credit is not ideal. Perhaps you recently were injured and couldn’t work. Maybe you lost your job or are recently divorced. There are quite a few reasons that can explain a loss of income that lead to difficulties making ends meet and therefore seeing your credit score diminish.
If you find yourself in that situation, know that it may still be possible to get a loan to buy a pre-owned vehicle. Called second (sometimes third chance) credit financing, this type of loan has one major drawback: a much higher interest rate than a traditional loan.
“Banks determine the interest rate they will charge based on the risk that a loan will not be repaid. This risk is determined by your credit score. So if your score is low, the bank believes there is a greater risk that you will not repay the loan and full and therefore charge a higher interest rate to compensate for that risk”, explains an F&I director at Bruce GM Digby.
So, ultimately, the main disadvantage of this type of loan is that you will pay a lot more money for a given pre-owned vehicle. On the other hand, if you plan accordingly, you may be able to improve your credit by meeting the monthly obligations associated with your loan. Often times, this type of loan is the only one available to you, so you can use it to demonstrate that you got your financial matters back on track.
The first thing to do, however, is to make sure you absolutely need to buy a vehicle. If you don’t, then why pay high interest? Then, you need to plan your budget ahead and determine the maximum amount per month you can afford for your next vehicle. By not going over that amount, and leaving yourself some room for unexpected expenses, you will ensure that you always manage to pay your loan when it is due, and thus improve your credit in the process.