How Can a Person Having Bad Credit Get a Car Loan?

No matter how you look at it, bad credit means most lenders want nothing to do with you. Some creditors, however, specialize in auto loans for people with bad credit---called subprime borrowers. Going to a subprime lender typically results in a tough decision, because he might offer a loan, but at a highly undesirable rate.

Subprime Lender

The most likely source of a car loan for a borrower with bad credit is a dealership that has a loan officer who deals with subprime consumers. Any subprime lender must charge a higher rate to a bad credit customer than a regular buyer to make up for the higher risk. The subprime lender may even demand a large upfront down payment.

Cosigner

A bad credit car loan provider probably hopes that any customer with terrible credit comes in with significant collateral or a cosigner. A cosigner agrees to take over payments if the primary account holder cannot meet them. The lender might not offer a loan if the cosigner has poor credit or a heavy debt burden. If the cosigner has good credit, the lender will likely tender an offer.

Considerations

You might not have terrible credit. Usually, anything in the range of 580 to 640 is an acceptable credit score. This probably won't garner the lowest rate the lender can offer, but you likely do not need a cosigner or large down payment. The best way to find out your score is to shop around. The credit scoring formula counts all auto loan inquiries in a 45-day period a single inquiry, so it harms your score far less than if you were shopping for a credit card.

Tip

The car dealership usually just helps you acquire a car loan through a traditional bank, but add on extra charges as a commission. Edmunds suggests going to banks or the lending institution, which probably saves you money. Also, securing financing on your own gives you more leverage, because you do not depend on the dealership for the loan.

Benefits of Rebuilding Your Credit

High-interest bad-credit car loans increase the chance of your loan going "under water"---you owe more money on the loan than the car's fair market value. Cleaning up your credit report months before going to the auto dealer increases your chance at approval and saves you money over the life of the loan. Start by eliminating debt and paying bills when they are due, this will eventually outweigh most of the negative items. You might need to open a new account to build history. Look for a department store card or a credit card backed by a security deposit, because these generally have the lowest standards.