You need a loan to buy a car, but with fair credit — generally a credit score between 630 and 689 — you worry you won’t qualify for a good interest rate. You might also be concerned that, with a lower credit score, the dealer might mark up your rate above what you really deserve.
However, by following these steps, you'll be in a better position to get the best rate available to you and be prepared to go car shopping.
Before you go to the dealership, make sure you’ve thought through your loan requirements. Try to answer the following:
Check your credit
You can get a free credit score from a number of sources, including NerdWallet. It won’t be exactly the same scoring model dealers use, but since credit scoring models emphasize the same factors, it will offer a good idea of where you stand.
Next, review your credit reports to see if there are mistakes that could be holding down your score. Use AnnualCreditReport.com to request reports from the three big credit reporting agencies, Equifax, Experian or TransUnion.
If there are mistakes that might be lowering your score, dispute the errors with the credit bureaus. Once the correction is made, you should see an improvement in your credit within a couple of months or sooner. With a higher credit score, may qualify for a car loan with a lower interest rate.
Get preapproved for an auto loan
Before going to the dealership, apply for a preapproved auto loan. This will show you what kind of an interest rate you will qualify for and simplify the car-buying process by allowing you to negotiate as a cash buyer at the dealership. Then, when you reach a deal, you can let the finance manager try to beat the interest rate of your preapproved loan.
Design your deal
Use an auto loan calculator to compare offers and see what monthly payment will best fit your budget. If you’re doubtful about qualifying for a loan, plan on making a larger down payment, possibly 20% of the purchase price of the car.
Auto loans should be paid off as quickly as possible, since, as the car ages, you might find yourself paying for repairs and the monthly car payment — or even owing more to the lender than your car is worth. Experts recommend setting the term of a used car loan to 36 months, even though this will make the payments higher. If you’re buying a new car, you can finance for 60 months.
Remember as you work with the calculator that you’ll have to pay sales taxes and fees. In many states this could amount to an additional 10% of the purchase price of the car.
Know what the dealer is looking for
Lenders, including the dealer, will look at your auto-specific credit score, which focuses on your car-related financial history. The factors that influence this score include your payment history on previous auto loans, settled or declared bankruptcy on car loans, and if you’ve ever had a vehicle repossessed.
The second element that dealers and lenders look at is your income stability. Ideally, if you have a fair credit score — and therefore probably a fair auto-specific score — you have good income stability to make up for it.
Try to build your credit from fair to good
If you can afford to wait to buy a car until after you elevate your credit from fair to good, then do so. With better credit you'll be able to get better financing options and lower rates for car insurance.
After you've disputed any score-lowering mistakes on your reports, there are other things you can do to help build your credit:
Focus on paying all your bills on time. Your payment history is one of the biggest factors influencing your score.
Try to lower how much of your credit limit is in use on each credit card. That's another big factor in your score.
Be careful about making too many credit applications. Credit checks can cause a small, temporary dip in your credit scores, but multiple applications while you are rate-shopping are often counted as a single application.
If you need a new or newer used car right away and can't spend time building credit, just get the best loan you can and then try to refinance your auto loan later as your credit improves.