Auto Loan Information: How to Buy a Car With Bad Credit

So you've got bad credit and want to buy a car? The outlook may not be as bleak as you think. Sure, people with the highest credit scores usually get the best deals on auto loans, but even bad-credit borrowers can find financing. That financing may even come from a bank or credit union offering somewhat respectable interest rates and terms. Sometimes banks and credit unions take chances on bad-credit car buyers by requiring a larger down payment. After all, the bank knows it has an ace up its sleeve--it can take back the car if you default, and keep the big down payment.

Instructions

1

Find out just how bad--or not so bad--your credit is. Get a copy of your credit report from the website Annual Credit Report (see Resources). The website was created to issue free credit reports as required under the federal Fair Credit Reporting Act. Order your credit score separately by following instructions that will be included on the credit report.

2

Compare your credit score with the scores of others being approved for car loans. Microsoft Money, citing statistics from CNW Marketing Research, reported that only 1 in 10 auto loan applicants with FICO credit scores of 620 or below was approved through a credit union or bank in April 2010. For those with credit scores between 620 and 749, 8 of 10 loans were approved.

3

Improve your credit score as much as possible by bringing all existing accounts current. Find all past-due accounts on the credit report along with other delinquent accounts such as charge-offs or collection items. Charge-offs are accounts that were closed by the creditor after you stopped paying. Collection items are delinquent accounts placed with debt collection agencies.

Contact the creditors or bill collectors for those accounts and offer to pay the balances in full in exchange for the negative information being removed from your credit report. That process is called pay-for-delete and is legal. Most creditors won't agree, but you should still try. Pay off as many of the delinquent debts as you can, with or without the pay-for-delete. Allow about 60 days for your credit reports and score to be updated following the payments.

4

Apply for a car loan where you bank. Sure, it may be a long shot, but your relationship with the bank could help. Chat with a loan officer as you turn in your application. Be upfront about your past credit problems and tell why things are better now. Wait for a decision that could come within minutes or the next day.

5

Apply for a loan at the dealership if you're turned down by your bank or credit union. The dealer will shop your application around to to a number of lenders if necessary, including those who are comfortable lending to bad-credit borrowers.

6

Find a neighborhood car lot if the dealership turns you down. You'll have to settle for a used car from this lot, and interest rates likely will be around a whopping 20-25 percent, according to Microsoft Money. The car lot may provide the financing or arrange for it through a finance company. Either way you may be required to make biweekly payments or agree to automatic debits from your checking account on your payday. Drive away with your newly purchased used car and keep working on your credit.