Upon hearing the phrase “bad credit,” people automatically think of late payments and maxed-out credit cards. Yes, these are the prime reasons why a person has a low credit score; however, there could be other reasons too such as:

• The adult with no credit history. Since lenders can’t assess your financial stability, they don’t think you can be trusted with a loan.
• The shopper with debts. Even if you are using 40% of your DTI ratio, which is 10% more than the ideal DTI, consider yourself in debt. When your income is less than your debt, lenders assume you can’t be trusted with a loan as you might not be able to pay it back due to your spending habits.
• The person who defaults on the loan. A single missed monthly payment is understandable. You might have had utility bills to pay or a necessary expenditure. However, when this becomes a regular occurrence, lenders don’t see you as a reliable borrower.
• The co-signer. Before you co-sign a loan, make sure the person you are vouching for can be trusted. If they default on the payment, your credit score will also suffer.

So, which category are you in?

Keep in mind that despite all these problems, you can still apply for bad credit car loans.

Amazed, right? Well, don’t just jump up and down with joy yet. There are a few things that you need to know before you go about financing your first car. 

Before we begin, let’s take a brief look at a credit score chart by FICO so that you can find out in which range you fall: 

Credit Score Range

• Very Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very Good: 740 to 799
• Exceptional: 800 to 850

If you have a bad credit score, then you will probably fall somewhere between 300 and 579. 

Understanding Your Credit Score

Now that you know what your credit score is, let’s take a look at the individual factors that make it up:

Note: You need to be aware of this information because it is considered by lenders while deciding whether you should be given bad credit car loans or not.

Payment History (35%)

Your payment history makes up 35% of your credit score. From making late payments to missing them completely, delinquencies on the report, and more, all these contribute to your payment history. It makes up for the largest part of your credit score and shows the lender how good you are with borrowing money and then paying it back. 

You can improve your payment history by simply making payments on time. 

Money You Owe (30%)

The amount of money you own collectively should not exceed a 30% mark. The higher this percentage, the deeper in debt you will be. This will make the lender think that even if you are a good candidate, you won’t be able to make the monthly car payments. 

Credit History (15%)

Your credit history is based on how many open lines of credit you have. The longer it dates back to, the easier it will be for the lender to know how good you are with managing your finances.

Credit Mix (10%)

This refers to your instalment loans such as mortgages and auto loans, and student loans. These have a set amount that needs to be paid each month. Then, there’s “revolving” credit, in which the amount owed is based on how many times your charge it and how quickly you pay off the balance. 

New Credit (10%)

The more credit lines you open, the further your credit score will fall because you might not be able to keep with each account’s payment.

Final Word

A few other factors that affect your credit score and are of importance to the lender when deciding whether to give you a loan or not are your employment history and how old the car is. The former shows the lender that you can hold down a job and will be able to make the monthly payments on time. The latter is all about securing the investment.

While financing a new car will be more expensive than a used one, the interest rate on it will be low. That’s because if you do miss any of the monthly payments and you can’t pay back on the maturity date, the lender will be able to sell the car and cover their losses easily. On the other hand, a used car might have mechanical problems that don’t make them a good investment. Moreover, if you default on the loan, the car won’t be sold for much.