What Can I Do When I Need a Car But Have Poor Credit?

A car is a major purchase that typically costs thousands of dollars. Banks and loan companies finance vehicles for consumers who cannot afford to pay the entire amount all at once. It usually takes good credit to qualify for a car loan, although Warren Clarke, an editor at the Edmunds car buying research website, states that there are some options for borrowers with poor credit ratings.

Definition

Poor credit can mean anything from a few delinquent or missed payments on loans or credit cards, to court judgments, previous vehicle repossessions and even bankruptcy. Credit score provider FICO explains that different problems have different effects on a person's score. Even late payments can have a big impact because they make up more than a third of a consumer's overall credit score. Bigger issues like unpaid bills that get charged off, repossessions, foreclosures and bankruptcies can make it nearly impossible to get loans.

Preparation

Prospective car buyers should check their credit reports to see how much negative information is really contained in their files. Credit bureaus often make mistakes, according to Dayana Yochim of the Motley Fool money advice website, so there may be harmful items that are appearing in error. Anyone can request their own Equifax, Experian and TransUnion credit reports for free once a year through annualcreditreport.com, the Federal Trade Commission (FTC) advises. Errors can be disputed through the credit bureau websites, and the bureaus must wipe them out if they cannot be verified within 30 days. This may raise a person's credit score enough to qualify for a car loan, or to get a better interest rate.

Process

Clarke advises car buyers with bad credit to shop around for loans. Dealers often advertise that they can help people with credit problems, but they make additional profits from the loan, so the interest rate is often excessive. Sub prime borrowers can talk directly to credit unions, banks and other lenders who may be willing to grant the financing, especially if there is a large down payment. The rate is lower because the dealer does not take a cut.

Alternative

Lenders often allow car buyers to get loans with co-signers who have good credit. The loan is granted based on the co-signer's records, and that person is equally responsible for repayment. The Experian credit bureau warns that if the car purchaser makes late payments, or skips some altogether, it hurts the co-signer's credit just as badly, and the bank can go after that person for the entire loan amount.

Solution

Sub prime borrowers who have no choice but to accept high interest loans can often refinance their accounts once their credit is rebuilt, according to Clark. Consumers who pay their bills on time, and keep their balances low, can often qualify for better financing within one to two years.