Getting an Auto Loan When You Have Bad Credit

If you have bad credit, you might make it a policy to avoid borrowing whenever possible. That’s usually doable when it comes to credit cards and other consumer loans, like those used to purchase furniture. But auto loans can be unavoidable. That’s because you probably need a car in order to get to and from work. And if your current car looks like it’s about to breathe its last, you will need to replace it.

For many people, that might require getting in auto loan. Sure, you can buy a “beater” – a very old, very inexpensive car, but that might doom you to performing serial repairs. In the end, it could be even more expensive than having a monthly payment. And in fact it can actually be worse, due to the downtime that multiple repairs will require.

For those reasons, getting an auto loan may be absolutely necessary for you, even if you have bad credit. But how can you get one without getting worked over in a bad loan?

Know Your Credit Score, then Work to Pull it Up

Before you even go shopping for a car, you should get the latest copy of your credit report, including your credit score. If you know your score is, that will eliminate the possibility of a car dealer or lender setting you up with a loan that will be based on a fabricated lower score.

You’ll also want to do whatever you can to improve your credit score. Even a small increase, say 20 or 30 points, can make a major difference in the amount of the loan you qualify for, as well as the interest rate that you will pay.

Once you have your credit report and credit score, review the credit report, paying particular attention to any derogatory information. That can include late payments and past due balances. If there is any information on the credit report that is in error, you should immediately dispute it. You’ll have to write a letter to the creditor explaining why the information reported is wrong, and provide documentation proving your point. If you’re right, the problem should be corrected within 30 days or so.

With past due balances, pay them off as soon as you can. If you don’t have enough money to pay them in full, offer to settle for less than the full amount due.

The elimination of erroneous derogatory credit, and the satisfaction of past due balances, can work wonders to improve your credit score. It may not get you from a bad credit range to a good one, but it can move you high enough up the ladder that you will have more options.

Check with Your Bank, But a Credit Union May be Better

It’s unlikely that this will prove to be a miraculous outcome, but you should always check first with the bank that you do business with regularly. As an existing customer of the bank, you may get better treatment than you will with other lenders.

Even better, check with a credit union. Though most people think of banks and credit unions as being essentially similar organizations, there are differences that can work in your favor, at least as far as credit unions are concerned.

Unlike banks, credit unions are owned by their depositors. That means that if you open an account in a credit union, you automatically become a member, not a customer. That doesn’t mean that a credit union will make a loan to you with bad credit, but they will generally be more lenient than a bank will.

For example, a credit union may approve your loan if you can demonstrate that your credit problems are in the past. They may favorably consider the fact that you have paid off past due balances, and brought your accounts current.

That’s not a guarantee of a loan, but it’s certainly an effort worth making.

Check With Lenders Others With Bad Credit Have Used

If you know of other people who have bad credit, and have recently purchased cars, check with them to see who their lenders are. There’s nothing better than a first-person referral. If they have had a good experience with a certain lender, you should consider applying to that company to see what they can do for you.

You can also check with some bad credit forums, where people are weighing in with their own experiences. Just be careful because sometimes those forums have people who are actually lenders, who are writing favorable reviews of certain companies to draw in the participants in the forum as potential customers.

You’ll Have to Shop for the Best Loans and Rates

No matter what lender you are thinking of applying with, you owe it to yourself to shop around. This is even more important when you have bad credit. You will most likely have to go with some sort of subprime type auto loan, and the only way to know that you are getting the best loan possible is by investigating multiple lenders.

You can shop for auto loans online since subprime auto lenders are typically available on the web. Certain sites report on various lenders to determine which are the best use. This will give you an opportunity to investigate several lenders to find the one that will work best for you.

Where You Shouldn’t Go for an Auto Loan

Whatever you do, don’t put yourself at the mercy of a car dealer to find financing for you. Dealers often have some sort of incentive to use certain lenders over others. For this reason, they may steer you toward a loan with a lender that will not be the best one available for you. That can get you stuck in a loan with a high interest rate and an unnecessarily extended loan term.

Though you may have to take a high interest loan in order to get the car that you need, you should think of it as being nothing more than a temporary arrangement. After a year or two, your credit should improve to the point where you can go to a bank or credit union and get a much more reasonable loan. But in the meantime, you’ll want to get the most comfortable loan arrangement possible. Check with some of the sources above, and see what you can come up with.