How to get a Car Loan when you have a Bad Credit Rating

If you have bad credit, there is always a reason for it. You may have spread your finances too thin, lost your job, incurred unexpected medical issues or just not paid your debt. Before you take out an auto loan, you must make sure that you are capable of making timely payments. The fact that someone is willing to give you an auto loan despite your bad credit does not mean that you have to take it. You must be positive that you can keep up with the payments and that you have a fail-safe in place in case of job loss or unexpected expenses.

After you have crunched the numbers and are sure a new car is financially feasible, research local car dealerships. If you have ever seen advertisements that feature a car dealership claiming they will finance anyone, you should start there. There are different requirements for each lender, but you will certainly need to provide proof of employment, residence and auto insurance in order to receive a loan. You should know that if you have a low credit rating, you probably won’t be able to drive off the lot in a brand new Lexus. You won’t get the car of your dreams, but you will be able to get reliable transportation and an opportunity to build your credit score so you can get the car of your dreams in the future.

Once you find a vehicle you like, the dealership will run your credit report and, depending on your credit score, send your loan application to the appropriate financier. The reason it is important to find a dealership that will “finance anyone” is because every time a potential lender runs your credit report, your credit score goes down.

If you go to six or seven different car dealerships and get turned down at each of them, all you’ve done is lowered your credit score a bit more. When a dealership has many different financing options your credit report is requested by the dealership and then distributed to the various financiers. This significantly decreases the number of times your credit score is requested and protects you from the damage done to your credit when it is checked multiple times.

If you have bad credit, you will most likely be financed with a subprime lender. These financiers specialize in financing people that they deem “high-risk” because of bad credit or no credit at all. Be prepared to pay a very high interest rate. Subprime lenders are not banks; they borrow money from banks at a low interest rate and loan it back out to customers at a much higher interest rate. They are taking a bigger risk and a certain percentage of their customers will never pay their loans. Because of this, they charge a higher interest rate in order to pay back the bank from whom they originally borrowed, pay their overhead, pay employees’ salaries and ultimately, to make a profit.

A 25% interest rate is high, and it may seem daunting when you’re signing your contract. The only upside to this is that if you make timely payments, establish a good payment history and do not default on other bills that will negatively affect your credit report, your credit score will improve and you should be able to get financing from a different financier at a lower interest rate the next time you buy a car.