How to Get a Bad-Credit Auto Loan

Time for a better car? You can get an auto loan even with bad credit.

Bad-credit auto loans are available for people who've suffered bankruptcy, previous repossessions, collections of unpaid bills, or who have low income or little credit history. The interest rates are higher, but when you need transportation, a bad-credit auto loan can be a way to get a car loan when other ways of financing aren't available.

There are two ways to get auto loans when you have bad credit. One is to shop for cars at lots that advertises "buy here pay here," rather than dealerships that use banks or new car credit services. Car dealers who finance the cars they sell are generally willing to loan money to buyers with bad credit. However, you're limited to what they have to sell, which may be older cars with higher mileage and more mechanical problems.

Another option is to get approval for a loan first, through a company that specializes in bad-credit auto loans. Then, knowing the approximate amount you can afford to spend, you can shop at a variety of car dealers.

This article will describe how to get pre-approved for an auto loan, even if you have bad credit.

Instructions

1. Gather proof of income and decide whether you're a good fit for a bad-credit auto loan. Bankruptcy in the past is generally okay, and even current bankruptcy can be acceptable if you have an "authorization to incur debt." You'll need to be employed or have regular fixed income though, and usually a phone number and proof of residence like a utility bill. If you only have a temporary or seasonal job, or are paid off the record so you can't get proof of income, or have very low income (under $1500 a month), getting even a bad-credit auto loan will be much harder.

2. Check your credit reports to make sure the information is accurate and doesn't make your credit look worse than it is. A credit score of 640 or less is generally considered the range for a bad-credit auto loan. You can check your credit free once a year at Annualcreditreport.com, and though it won't give your score, it'll give more important information like an itemized list of debts, past-due items, etc. Dispute and get corrected anything which is inaccurate. Also, avoid applying for other loans or "shopping around" for too many loans at the time you want to apply for an auto loan, since this can reflect negatively on your credit score.

3. See how much down-payment you can come up with. The more cash you can put down on a car, even in addition to a trade-in, the cheaper your loan will be. Your monthly payments will also be lower on an inexpensive newer-model or low-mileage car, since the expected life of the car is longer and therefore the length of the loan can be longer. However, the total cost of the loan will be higher, since you'll pay more interest over the length of the loan, so apply for the shortest loan you can afford.

4. Search online for companies that advertise bad credit auto loans or bad credit car loans. Read their websites and see what services they offer to pre-quality you for a loan. Before choosing any, also search online for consumer reviews or complaints, to make sure you're dealing with a reputable company.

5. Apply online for an estimate of the credit you may be offered. If you want to proceed, make sure that any confidential information, such as bank account or social security numbers, is sent on a secure website with the "lock" symbol displayed, or is sent directly by fax or mail. Never pay to apply to a loan. Be prepared to document all your information, since bad-credit auto loan companies need to be careful about their loans. Expect to provide proof of your residence, proof of income, and answer questions about your household. The interest rate you'll be offered depends on many factors, and may be as low as only a few percentage points above a regular auto loan, or as high as 25% or 30%. However, if you must accept a high interest rate, you can look toward refinancing your car as soon as your credit improves.