Auto Financing with Bad Credit

You’ve just learned that your request for an auto loan with a bank has been denied.  The loan officer explains that the decision has to do with your credit score.  The bank lends only to prime borrowers; your credit score puts you in subprime car loan territory.

Subprime.  You thought this was only in the mortgage industry.  You are probably not sure exactly what it means, but it sounds like a condemnation that will forever brand you as being somehow deficient to car loan lenders and others in the credit industry.

However, being deemed subprime doesn’t necessarily mean that your car loan borrowing days are over.  It may still be possible for you to get that sought-after car loan, but from a different lender.

The first thing to understand is the term that defines you.  A subprime borrower is one with blemished credit.  Each lender has its own definition of what constitutes a subprime borrower, but typically, a credit score of less than 620 lands you in this less-than-desirable category.  For more information on credit scores, and what sort of factors cause them to suffer, please review credit report 101, or at least consult one of the many online credit websites.

Car loan practices have tightened but there are still some credit grantors specializing in subprime lending who are willing to loan money to buy a new or used car those with less than perfect credit.  Naturally, there’s a catch.  The car loan interest rates for subprime borrowers are frequently measurably higher, significantly steeper than those paid by their more credit-worthy brethren.

So, now that you understand what your playing field looks like, how can you finesse the game in a way that gets you a reasonably priced car loan?  Here are a few tips:

Check your credit report.

Make sure that everything on your report is accurate; it could be that information has been entered in error, and that your credit history is a lot less blemished than you’ve been led to believe.  If you do find information on your report that is inaccurate, you need to address it right away.  Contact the credit bureaus in writing, listing your name and address and clearly detailing the nature of the error or a close summation of the nature of the error.

Access your credit score.

For a long time, credit scores were available only to prospective lenders, who used them to evaluate those seeking loans.  That has changed; it’s now possible for consumers to access this all-important number.  Your score is available online from each of the three credit bureaus: Trans Union, Experian and Equifax.  If you’ve got bad credit, it’s helpful to know it beforehand.  Knowing your credit score will help give you a sense of exactly where you stand in your search for an auto loan.

Don’t rely on the car dealership.

Dealers take a cut of all car financing deals they land; as a result, any loan that they’re able to get you with a bank or financing company is likely to wind up being more costly to you than if you had contacted the lending institution on your own.  Ideally, you’ll want to secure your auto loan before setting foot inside the dealership.  Check car loan rates in advance and get a loan approval before stepping on to the dealers lot.

Have a co-signer.

If someone close to you has very good credit and is willing to co-sign on your car loan, which can make a big difference.  This has to be a friend or family member to whom you are very close and trusted, as they are putting their credit on the line too.

Shop around.

Car loan rates will vary from lender to lender; take the time to look around and see what deals are available.  Lenders typically define their business according to credit tiers (A, A- and so on.); speak with loan officers regarding how each tier is linked to credit score and interest rate.  Have something in writing from each lender will make it easier to compare your options effectively.  If you have a checking account, make sure to include your bank in your search for a loan.  Many banks have entire departments dedicated to providing loans to those with flawed credit, and they tend to look more favorably upon applicants who are current clients.  Your credit union is also a good place to turn.  For years, credit unions have had a reputation of lending only to members with good credit, but that’s begun to change.  Many are now beginning to expand their business to include those with less-than-perfect credit.

Remember that your credit score is ever-changing.  When it comes to your credit history, the ball is entirely in your court.  You can improve your bad credit by paying your bills on time, and not overextending yourself when it comes to loans and credit cards.  With proper attention paid to the state of your credit, you could conceivably lift yourself out of the subprime category in as little as several months or shorter.  Going forward, check your credit score every month while the record is fresh.  You may have to pay more than you’d like for the auto loan you’re about to receive, but in a couple of years, if your credit score has improved, you’ll probably be able to refinance your car loan at a much lower rate.

Tags: auto loan, Car loan, car loan interest rates, car loan rates, car loan refinance

This entry was posted on Thursday, March 12th, 2009 at 6:53 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.