If you've got bad credit, you'll need to take a non-traditional approach to buying a car. A low credit score can impact your ability to qualify for a low interest, low down payment car loan. The process can be especially troublesome if you have a repossession, foreclosure or bankruptcy in your recent past.
Check Your Credit
Check your credit report before you start shopping for a car. Fix any inaccurate entries and know both your numerical score, and what derogatory remarks have been made by former creditors. A lender may want an explanation for past delinquencies or defaults, so pulling your own credit will ensure you know what it looks like before negotiations begin.
Make a Large Down Payment
The bigger the deposit you can put toward your car loan, the greater the likelihood the lender will see you as a reasonable credit risk. You may still be subject to higher interest rates, particularly if you buy a used car. If you have a vehicle to trade in, it can help reduce the amount you're financing as well. Check reputable sources like Edmunds and Kelley Blue Book so you know the value of your trade-in before hitting a car lot.
If you have a troublesome credit history and shaky financial resources, you may be better served trading down to a more affordable car. If you have equity in a current vehicle and can trade it in and buy something less expensive and more fuel-efficient, you'll improve your financial situation overall. If you're short on cash, this approach also gives you that down payment that's important to lenders when dealing with someone with poor credit history.
Get a Cosigner
Having someone with a solid financial and credit history volunteer to be a cosigner on a new loan can greatly improve your chances for getting approved. A cosigner agrees to be responsible for your loan in the event you are unable to make the payments yourself. It's a big favor to ask someone, so be sure of your ability to repay the loan prior to approaching someone else about taking on the financial burden.
Shop Around for Loans
It's always a good idea to comparison shop loans when you're considering a car purchase. It's all the more vital when you have poor credit. Inquire first at your own bank or credit union, if you have a good relationship and financially stable background. Car dealerships may also have connections to lenders that make subprime loans, making special offers to, "approve anyone regardless of credit." Expect these interest rates to be higher than the going rate, from the mid-teens to low 20s. Usery rates, or maximums lenders can charge, vary by state and can be found through your secretary of state's website. Loan lengths are usually higher as well, and can be as long as 96 months. Use caution when shopping bad-credit lenders or you could fall prey to scams.
- Car Buying Tips: Bad Credit Auto Loans -- Tips and Scams to Avoid
- Consumer Reports.org: How to Get the Best Car Loan
- Edmunds.com: Car Financing Pitfalls and Solutions
- Cars Direct: Car Loan Cosigner Requirements
- Bankrate.com: Loan Co-signer Must Have Good Credit
- FTC.gov: Free Credit Report
- FTC.gov: Consumer Information: Coping with Debt
- New York State Department of Financial Services: Understanding Your Credit Report and Your Credit Score
- Center for Responsible Lending: CRL Identifies Risks Lurking in the Subprime Auto Market
- FTC.gov: Understanding Vehicle Financing
- Kelley Blue Book