If you’re thinking about buying a car or home, but your credit isn’t in the best shape, you may be worried that the lender will turn you down. You don’t have to fret, though; you can actually get approved for both a bad credit car loan and a bad credit home loan at the same time.
As long as you know what to look out for and avoid when getting each type of loan, there’s no reason why your financial circumstances should stop you from purchasing either one.
What you need to know
If you’re getting a car loan, take notice of your credit score. Why? Because, just like with a mortgage, lenders will ask for your FICO score when you get a loan for a car. And just like mortgages, there are two different types of car loans: bad credit car loans and good credit car loans.
How your bad credit could affect you
Your credit plays a big role in determining your mortgage rate. And if your credit is bad, it’s likely that your interest rate will be higher than someone with good credit.
When you apply for a mortgage, there are three major factors lenders look at when evaluating whether you get approved: income, down payment and credit history.
If you have no or poor credit history, consider getting a secured loan first. Secured loans usually require a significant down payment and sometimes collateral (for example if you get an auto loan), which makes it easier to build up your credit score before applying for an unsecured loan later on.
Keeping bad credit in check
Owning a car and having a home are considered basic steps toward financial stability. While it’s not always possible to get financing for both at once, most people manage to put together each of these purchases using credit.
That said, if you’re dealing with a long-term, bad credit situation, it might be tempting to avoid further borrowing. If you can, keep in mind that credit isn’t just about whether or not your loan gets approved—it also means whether your interest rate is good and whether or not your payments are affordable.
Getting loans for new purchases can help you build credit by demonstrating your willingness and ability to pay back money that you borrow from others.
Tips for managing bad credit
Think of your credit score as a report card that grades you on your financial activity. A higher credit score reflects a history of managing debt well and being financially responsible. In contrast, a lower score indicates irresponsible spending and missed payments.
FICO scores range from 300-850, with any score above 700 considered good. (FICO uses three different variations of its scale: retail cards, department store cards and instalment loans).
It’s not uncommon for people with bad credit scores to be denied loans or lines of credit, particularly mortgages and home equity lines of credit (HELOCs). So how can you know if it’s wise to apply for new financing with a bad report card in hand?