Car Loans Are Harder to Get Than Ever. Here Are 6 Tips for Securing Financing

If you plan to buy a car soon, you may find that it's getting harder to secure financing. In June, the rejection rate for auto loans increased to 14.2%, up from 9.1% in February, according to the Federal Reserve Bank of New York's June SCE Credit Access Survey.

The reason: Lenders are getting jittery as high inflation and surging interest rates have pushed many consumers to take on more debt than they can afford. Delinquency rates for both auto loans and credit cards have recently surpassed pre-pandemic levels.

Because lenders are being pickier than ever, you'll need to take a few extra steps before you head to the car dealership. Follow these six tips to secure auto financing in a tight credit market.

1. Save for a large down payment

Saving a larger down payment may not be an option if you need new transportation ASAP. But if you have some wiggle room, taking a few months to save can help your application get approved. When you put more money down on a car purchase, you're less risky to the lender. Plus, you'll lower your monthly payments and interest rates.

2. Improve your credit score

Again, if you need to buy a car right away, you won't have time to increase your credit score. But if you have bad credit and can wait six months to a year to replace your car, it may be worth delaying your purchase until you can improve your credit.

If you don't have open credit, try applying for a secured credit card to start building a positive payment history with the credit bureaus. Paying off a significant chunk of credit card debt can also help you improve your score quickly because it will lower your credit usage, which accounts for 30% of your credit score. You'll also reduce your debt-to-income ratio, which could help your car loan application get approved.

3. Negotiate your trade-in

If you'll be trading in a vehicle, make sure you negotiate the best price possible since you can use the money you get toward your down payment. Be sure to negotiate your trade-in separately from your vehicle purchase. You can research your car's value using Kelley Blue Book or Edmunds, then get quotes from third-party online car retailers, like CarMax, that make cash offers on trade-ins.

4. Get pre-approval from a lender

You can apply for an auto loan on your own so you've secured financing before you set foot on the dealership lot. Once you've negotiated the car price, you can see if the dealer can beat the financing offer you have in hand through its network of lenders. While this option is typically best if you have good credit, some online lenders specialize in lending money to people with bad credit.

5. Ask someone to cosign

If you're having trouble getting approved for auto financing, you could ask a family member or friend with better credit to cosign the loan. But before you make this request, you need to be absolutely certain you can afford the payments. Your loved one is taking a risk on you. One late or missed payment could damage their credit.

6. Consider buy-here, pay-here dealers only as a last resort

You've probably heard advertisements for no-credit-check auto loans. These are typically offered by buy-here, pay-here dealerships, where the dealership is both the seller and the lender. They often base approval on your income and frequently require a large down payment.

If you need a car and can't obtain financing through a bank, credit union, or traditional dealership, a buy-here, pay-here dealership may be your only option. But only consider these dealerships as a last resort. The interest rates and fees are often exorbitant, plus many require you to make payments weekly or every other week. Some dealerships will even require a tracking device in your vehicle so they can repossess your car if you miss a payment.

Shopping for a car? You need two budgets

Before you shop for a car, you need to have two separate budgets -- one for your monthly payment and the other for the overall price of the car. Focus on the overall car price, rather than the monthly payment, when you negotiate with the dealer. Many dealers will try to talk you into a monthly payment that fits in your budget, but extend the loan over 72 months or even 84 months -- which, of course, means you'll pay a lot more interest. Aim to finance a vehicle over 60 months or fewer.

If you're struggling to get approval for a car loan, you may need to shop for a cheaper car, put more money down, or find a cosigner. As always, it pays to shop around, so be sure to get quotes from multiple lenders. Even if you have poor credit, you may be able to find a lender who can work with your situation.