How to Get a Car Loan With Bad Credit?

Because the majority of loan terms are dependent on your credit history, it’s always harder for low credit score borrowers to get approved. However, now through the end of 2012 will be the best time to get a car loan or refinance your car loan regardless of your credit. And if you have bad credit, your chance for car loan approval is better, and your ability to negotiate terms is much greater.

First things first, take a look at your credit history and credit score, and decide what you can change to make your credit even better before you approach a loan company. Credit scores range from 350 to 900, 350 being very poor credit and 900 being pristine credit. Usually, credit scores are defined in these levels listed below:

  • Below 550: Poor Credit
  • 550-650: Less Than Acceptable
  • 650-750: Acceptable
  • Above 750: Near Perfect

If you are on the edge of one of these levels, it would be worth your time to put some effort into fixing your credit history. Your credit score is affected by your payment history, outstanding balance, account age, types of credit and number of inquiries from your creditors. It’s best to attack all these components at once, but if you’re in a time crunch or overwhelmed by the bulk of fixes, pick one or two. The most influential factor on your credit history is your payment history and outstanding balance. To attack these, make sure you’re making your payments on time, and your balances are at least 30 percent below your credit limit. The lower you can make your balances, the better your credit score.

When you’re ready to start applying for loans, select a modest compact or midsize vehicle. Budget your expenses properly and save for a car that fits your needs. If you approach a lender with poor credit and risky loan terms (like long term, high payment terms for an expensive car), you’re more likely to be denied. Smaller cars will give you a lower interest rate and a lower insurance cost. In addition, you’ll spend less money on gas, and spend less time maintaining this car as smaller cars usually need less upkeep over the years. (TIP: Driving appropriate speeds and making sure your tires are always inflated properly is another way to save money on gas!)

Next, find a lender who specializes in car loans for bad credit borrowers. Although there are a lot of car loan companies out there right now, many of them have done loan shoppers a favor by advertising their specialty (i.e. loans for poor credit, refinance loans, simple interest, long/short term, etc.). Car loan companies who do most of their work in refinance will be much more comfortable working with you, and will give you advice and tips to help lower your interest rate, too!

Last but not least, try to get approved before you go to the dealership! Especially with poor credit, you’re less likely to get a good deal if you just walk into the dealership and let your salesperson negotiate with you. Walking in with an approved car loan will give you the advantages of a cash buyer. You’ll also stick to your car budget much better with a loan in hand.

This fall is a great time to apply for a car loan. The prices are still low from the recession, and so are the interest rates. Even with bad credit, you’ll reap a lot of benefits by applying now.