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How to Negotiate Car Financing with a Low Credit Score

How to Negotiate Car Financing with a Low Credit Score

10 January 2024 Concept Car

Negotiating car financing with a low credit score can be challenging.

Lenders consider credit scores as an indicator of your creditworthiness. A low credit score suggests a higher risk of defaulting on loan payments. As a result, many traditional lenders may be hesitant to offer favourable financing terms or may even reject your loan application altogether.

As a result, you’ll have fewer lenders to choose from. This, in turn, severely reduces the options available for negotiation.

So, are your chances of success very slim?

Not necessarily. We’ll explain in a second why you should definitely not give up hope or be too pessimistic.

Be prepared, however, that your deal may not be quite as good as you might hope. The following are typical for a bad credit car loan:

Higher interest rates: If you manage to secure financing with a low credit score, lenders often compensate for the increased risk by charging higher interest rates.
Stricter requirements: Lenders may impose stricter requirements, such as higher down payments or additional collateral, to mitigate the risks associated with a low credit score.

Generally speaking, with a low credit score, you will have far less leverage during negotiations when it comes to lower interest rates, longer repayment periods, or other favourable conditions.

By no means, however, does this mean that there is no room to negotiate at all.

Further Reading:
Buying a cheap car: Strategies that work

There are hard facts why negotiating for a better deal makes sense even with bad credit.

For one, the mere existence of specialised lenders indicates that you can pay off a loan perfectly well with a low credit score as well. How does this work? At CCC, for example, we simply consider other factors, such as income, employment stability, and down payment amount, alongside credit history.

We take into consideration a stable employment history, a history of on-time payments for other loans, or a positive relationship with the bank. If you can demonstrate financial responsibility and stability despite a low credit score, it will increase your chances of negotiating better financing terms.

Finally, selling cars is a volume business. Even the most strict dealerships can not afford to accept perfect-credit-score-applications only. Don’t be ashamed of your score, but enter negotiations with your chin held up high!

But what do I tell the dealer if my score is low?

You could pretend that your finances are better than they actually are, and aim at a really low interest rate and great conditions. Ultimately, of course, the dealer will find out either way and you may end up with no deal at all.

Or, you could discuss your low credit score with the dealership and decide to remain open and honest about it. Being honest doesn’t exclude advocating for yourself, after all.

In the next sections, we’ll go into some of the points you can concretely make to improve your chances of a successful negotiation.

Further Reading:
Why haggling is a mistake (and what to do instead)

#1 // Explaining the Circumstances Behind a Low Credit Score

Being able to understand the factors that led to your low credit score can make a huge difference for a potential lender. Credit scores are incredibly useful precisely because they are so condensed. But this compression of your financial life story into a single number comes with its risks, too.

If you can provide a satisfying explanation about the circumstances that contributed to your credit score, you can provide valuable context for the dealership.

It is important to understand that both dealers and financial institutions are made up of humans, too. They are well aware of the fact that life is unpredictable, and temporary setbacks can happen to anyone. Whether it was a job loss, medical expenses, or other unforeseen circumstances, it’s essential to be open and honest about these challenges.

By explaining the temporary nature of the setback and their impact on your credit history, you can help the dealership understand that your low credit score does not necessarily reflect your long-term creditworthiness.

Further Reading:
Just be nice! Why the soft strategy to car finance is key to success!

What about periods of unemployment?

Unemployment can create financial strain and affect credit scores. To examine just how severe the effects can be, let’s take a look at an example.

Let’s imagine you had a stable job and a good credit score until you faced a six-month period of unemployment due to industry layoffs. Assuming the current market average interest rate for car loans is 5%, your lower credit score might result in an interest rate of around 8%. On a £20,000 car loan with a 60-month term, this difference in interest rates would result in an additional £2,228 in interest over the life of the loan.

The higher interest rate will furthermore directly affect your monthly payments. With an 8% interest rate, your monthly payment would be approximately £407. However, if you had a better credit score, unaffected by unemployment, and secured a 5% interest rate, your monthly payment would be approximately £377.

It may not seem like a lot. But this £30 difference in monthly payments can impact your budget more than you’d think. And, to be frank, as your score drops really low, the interest rate is likely to rise well beyond just 8%.

Unemployment is not the end, however. We’ll get to the steps to negotiate a better deal in the final section of this article.

Further Reading:
Car Credit for the Unemployed – is it possible?
Repossessed cars for sale in the UK: Our primer

#2 // Emphasising Positive Factors to Offset a Low Credit Score

Having a low credit score doesn’t mean your entire financial profile is negative.

By emphasising positive factors that offset the impact of your credit score, you can present a more comprehensive picture of your financial stability. One essential piece of the puzzle is showcasing a stable employment history.

In the previous section we explained just how costly a former or current phase of unemployment can be. Vice versa, stability will conversely give you a much better negotiation position.

If you have held a consistent job for an extended period, emphasise this to the dealership. Explain the length of your employment, any advancements or promotions, and the reliability of your income. This information can help the dealership recognise your ability to meet financial commitments despite your credit score.

Stable employment equals a steady source of income.

You don’t need to be rich to get a loan. What matters to the lender is simply that you won’t default on the loan and that you won’t take too long to repay it. As long as you can meet these conditions, you should be fine.

This is why, if you should have a steady income from sources such as regular employment, self-employment, or investments, you should make sure to communicate this to the dealership.

Provide documentation to support your income claims and highlight the consistency of your earnings. This will help alleviate concerns about your ability to make regular loan payments.

Another aspect to consider is that your credit score may not reflect your payment history for all financial obligations. If you have a history of timely payments for bills, rent, or other loans, bring this to the dealership’s attention. Here, too, provide evidence, such as payment receipts or statements, to substantiate your claims.

Demonstrating your responsible payment behaviour can offset the negative impact on your credit score.

#3: Demonstrating Willingness to Improve Your Credit Situation

No, your credit score is not everything. But yes, rebuilding it is a powerful step towards financial stability and can positively impact your car financing options.

By demonstrating your commitment to improving your credit situation, you can convey to the dealership that your low credit score is not indicative of your long-term creditworthiness.

So what steps can you take to actually make a difference?

Here are a few suggestions to get you started:

Pay bills on time: Consistently paying your bills on time is a crucial factor in rebuilding your credit. Your track record may not yet reflect this, but you can start to make a change every day. Set up standing orders for recurring payments, set reminders in case you can’t foot a bill straight away and do everything you can to never miss a single payment ever again.
Reducing Debt: Taking proactive steps to reduce your debts can significantly improve your creditworthiness. One recommendation is to consolidate your debt as much as you can. If you have multiple credit cards, only keep your main one. And start paying off the debt with the most interest first.

Make sure the dealer knows about any debt repayment plans, debt consolidation strategies, or negotiations you have initiated.

Further Reading:
How to improve your credit score

The Power of a Larger Down Payment in Car Financing Negotiations

Down payments aren’t popular. Especially if your credit score is low, you may want to keep payments as low and your savings as high as possible.

This is why we feel it is particularly important to stress that when it comes to securing car financing with a low credit score, a larger down payment can make a significant difference in the negotiation process.

Further Reading:
Are zero down payment auto loans a terrible idea?

Why is a larger down payment so particularly effective for those with a bad credit score?

There are several reasons why you should try everything at your disposal to reduce the overall loan sum right at the very beginning:

  • You’re demonstrating financial commitment: A substantial down payment signals to the lender that you are serious about the purchase and committed to meeting your financial obligations. This can help build trust and improve your negotiating position.
  • Reducing loan amount: A larger down payment directly reduces the loan amount you need to finance.
  • Lowering the Loan-to-Value Ratio (LTV): The loan-to-value ratio is the percentage of the vehicle’s value that you are financing. A larger down payment lowers the LTV ratio, which can be advantageous during negotiations. A lower LTV ratio reduces the lender’s exposure and provides them with a greater sense of security.

Can the choice of car model make a difference in negotiations?

Absolutely. When negotiating car finance with a bad credit score, your choice of car model can play a crucial role in improving your chances of success.

Selecting the right car can help mitigate the impact on your credit score, increase your negotiating power, and enhance the likelihood of obtaining more favourable financing terms.

Let’s take a look at what to consider specifically in the following sections! At CCC, we have a vast selection of fantastic used cars to meet all preferences and needs. Take a closer look on our online showroom.

Opt for Affordable and Reliable Models

Choosing an affordable and reliable car model can strengthen your negotiating position.

Speaking more concretely, reliability means low maintenance costs, and reasonable insurance rates. It means less technical gadgets and a focus on the core aspects of the driving experience.

Reliability is not subjective. Several magazines and institutions conduct large-scale studies each year and have done so for years, sometimes decades. This allows you to get a pretty precise picture of which models, brands and generations are best when it comes to reliability.

By awarding preference to this, you demonstrate to the lender that you are making a responsible choice and reducing the perceived risk associated with financing the vehicle.

Only Buy Used

Exploring used car options is highly advantageous when negotiating car finance with a bad credit score.

Used cars have far lower purchase prices, reducing the loan amount required. With a smaller loan, lenders may perceive the risk to be lower and may be more willing to offer better financing terms.

At the moment, used cars are relatively expensive and you may have seen headlines claiming that some of them are actually more costly than a comparable new model. This is mostly exaggerated. If you’re willing to wait for a good deal, a second hand vehicle will always be more attractive financially than a new one.

It will help to research the resale values and depreciation rates for all of the cars potentially of interest to you. This makes sense because some car models retain their value better than others. Cars with a higher depreciation are ironically more interesting than those with a low one – because they’re cheaper to buy used!

Demonstrate Awareness of Total Cost of Ownership

During negotiations, showcase your understanding of the total cost of ownership for the chosen car model. This includes factors such as fuel efficiency, insurance costs, maintenance expenses, and potential repairs.

By demonstrating your knowledge of these costs and how they align with your budget, you can alleviate the lender’s concerns about your ability to afford the vehicle and make timely loan payments..

Improving Your Communication Strategy

Negotiating a good car finance deal is not just about hard facts. It is also about communication. Some might even say, it is foremost about this.

We should caution against getting your hopes up too high. Even if you’re a great communicator, you won’t convince a salesperson that you’re worth an investment just because you have the gift of the gab.

However, we do believe that you can gain a lot from adhering to the following points:

#1: Building Rapport in Negotiations: Establishing Trust for Effective Communication

Building rapport is a critical aspect of successful negotiations. When engaging in car finance negotiations, establishing a positive and trusting relationship with the dealership staff can greatly enhance your chances of reaching a positive outcome.

It sets the tone for the negotiation process.

How to do this in practice?

Smile, make eye contact, and use a warm tone of voice. By initiating the interaction on a positive note, you lay the foundation for a more productive and collaborative negotiation experience.

Active listening is a powerful rapport-building tool. Show genuine interest in the other person’s perspective by listening attentively to their statements, concerns, and questions. Ask open-ended questions to encourage further dialogue.

These are not theoretical concepts. They will actually make a difference. By going into the negotiations with an open mind, you are allowing yourself to discover shared interests .

#2: Consistency is key

Consistency is absolutely crucial in establishing trust.

What we mean by this is simply to follow through on your commitments and promises during negotiations. Be reliable, transparent, and honest in your communication. Don’t change course midway or aggressively leave the showroom to make a point.

By demonstrating consistency and integrity, you build trust with the dealership staff, enabling more open and constructive communication.

#3: Articulating Objectives: Communicating Clear Goals for Successful Negotiations

Clearly articulating your objectives and priorities during car finance negotiations is key to a successful outcome. By expressing your goals with clarity and precision, you set the stage for a more focused and productive negotiation process.

Here’s how you can put this goal into practice:

  • When stating your objectives, be specific about what you want to achieve. Whether it’s securing a lower interest rate, extending the loan term, or reducing fees, express your goals clearly and concisely. Avoid vague statements and provide concrete examples that allow the dealership staff to understand your desired outcomes.
  • Prioritise Your Objectives: While it’s essential to communicate your objectives clearly, it’s equally important to prioritise them. By identifying your priorities, you can direct the conversation toward the aspects that have the greatest impact on your car finance deal.
  • Explain the Rationale: Explain why certain terms or conditions are important to you and how they align with your financial goals. By offering a logical explanation, you demonstrate that your objectives are reasonable and based on sound judgment, increasing the likelihood of a favourable response. Whenever possible, support your objectives with relevant data and research.

#4: Maintaining Composure and Calmness in Car Finance Negotiations

Car finance negotiations can sometimes become intense and emotionally charged, particularly when dealing with a bad credit score. It is crucial to maintain composure and calmness throughout the negotiation process.

By staying composed, you can think clearly, make rational decisions, and foster effective communication.

A key part of this is to control your emotions. Stay mindful of your emotional state and practice self-awareness. Recognise any signs of frustration, anger, or impatience and consciously choose to remain calm and composed.

Taking a deep breath, counting to ten, or mentally stepping back can help you regain control and approach the negotiation from a more balanced perspective.

How to communicate calmly

Remaining professional and remaining calm are pretty much the same thing. It will make you seem like you’re in control the entire time and allow you to take rational decisions.

Certain communication techniques can prove to be helpful here:

  • Practice Active Listening and Empathy: By truly listening to the dealership staff’s concerns, needs, and perspectives, you show respect and understanding. Put yourself in their shoes and strive to see the negotiation from their point of view. This doesn’t mean you need to neglect your own needs. Simply be aware that the other side may have its points, too.
  • Respond Thoughtfully, Not Reactively: Take a moment to consider your response, gather your thoughts, and choose your words carefully. Responding thoughtfully allows you to provide well-reasoned arguments and maintain composure, even in challenging situations. Avoid getting defensive or taking comments personally, as it can hinder effective communication.
  • Take Breaks When Needed: If the negotiation becomes particularly intense or overwhelming, it is acceptable to request a short break. Stepping away from the negotiation table for a few minutes can help you collect your thoughts, regroup, and regain composure.

#5: Focus on the Big Picture

Without a single doubt, this is one of the most under-appreciated aspects of any conversation with a lender.

During negotiations, it’s easy to get caught up in small details or moments of tension. However, it is important to stay focused on the bigger picture and your ultimate objectives.

Remind yourself of your financial goals, the importance of securing a favourable car finance deal, and the potential long-term benefits. By maintaining perspective, you can prevent minor setbacks or challenges from derailing the negotiation process.

#6: Embracing Flexibility and Compromise in Car Finance Negotiations

By embracing flexibility and finding mutually acceptable solutions, you can foster a collaborative negotiation environment and increase the likelihood of reaching an agreement.

Negotiation is a give-and-take process. Recognise that compromises may be necessary to reach a mutually acceptable agreement. Understand that achieving all of your desired terms may not be feasible, and consider the overall outcome rather than focusing on individual demands.

One way to do this is to explore different scenarios. Consider alternative terms or options that may be offered by the dealership. Analyse how these scenarios align with your objectives and financial situation.

I will also help to seek win-win solutions that benefit both parties. Look for opportunities where both you and the dealership can achieve your objectives or gain value from the negotiation outcome. Emphasize collaboration rather than competition.

Still need support?

Negotiating a car deal with bad credit can be a daunting proposition. But it doesn’t need to be.

At Concept Car Credit, we want the experience to be smooth and pleasant just as much as we want you to be able to afford the deal.

Our team is here to help. Get in touch now if you’re looking for a great used car.

Call us at 0800 247 1015
or use our contact form for a free quote.

10 January 2024 Concept Car