How do I get a Car Loan with Bad Credit?

It is possible to get a good car loan with bad credit, although it will require some extra work. A few steps can dramatically improve the quality of used car loans available to people with poor credit, and a wise borrower will do his or her homework before going out to look for a car. Two things borrowers should keep in mind: take the time to sit down and make a budget to determine how much car they can afford, and avoid dealer financing, because it often comes at a high price.

The first thing to do is to assess how bad the situation really is by ordering a copy of a credit report from Equifax, Transunion, or Experian. It is important to review the credit report for erroneous information, as correcting this information will clean up someone's credit history, and often result in an increase in their credit score after a few months. People who want to get a car loan with bad credit should also focus on keeping their credit from getting any worse by making payments on time and staying on top of bills. Paying off substantial balances or reducing carried balances on credit cars can also cause a dramatic spike in someone's credit score, which will result in a loan with better terms.

People who want to apply for a car loan with bad credit should be prepared to pay a higher interest rate than the rate advertised by the lender, and they should also be prepared to provide a larger down payment. Borrowers may also find that the best rates will come from local lenders, as they may have more flexibility when it comes to the terms of loans for individual borrowers. Someone with bad credit due to mistakes made a few years ago who can provide supporting documentation that he or she is being more responsible today might be able to convince a loan officer to reduce the interest at a credit union or local bank, while a national chain will usually not accommodate unique situations.

It is important to shop around, and to actually speak with loan officers. The advertised rates on car loans reflect ideal borrowers with high credit scores, but the bank should be able to provide examples of its tiered financing so that borrowers with bad credit can get an idea of the kind of interest rate that they will be offered, and how much they will need to put down to get a car loan with bad credit. Borrowers may find that it helps to use a car financing calculator to determine how changes in the down payment, length of the loan, and interest rate change the monthly payments and cost of the loan over time. The difference between 8.75% interest and 9% interest might not look like much on paper, for example, but it can be huge when it comes to loan repayment.

After shopping around, a borrower should have developed a list of several lenders who will offer a car loan with bad credit at an interest rate which seems reasonable. Then, the borrower can ask for “prequalification,” in which a loan officer runs the borrower's information through the bank's system to get an actual quote on a loan. Prequalification can alert a buyer to how much money the bank is willing to lend, and what kind of interest rate and repayment terms to expect. Borrowers are by no means required or expected to take out the full amount a bank will offer, and since some banks overestimate the amount people can afford, it can in fact be a bad idea to use this number as a yardstick when looking at cars to buy.