Bad-Credit
Car Loans Are Possible
By Joel Walsh
Bad-credit car
loans may not be easy to find, but if you need a car,
they are worth it.
Bad-credit car loans
carry a higher risk to the lender, so the borrower must
pay a higher than usual interest rate. You probably
will need to apply to more than one lender and give
more documentation. Still, a bad-credit loan is worth
the trouble because it not only lets you get the car
you need and want, but can also help improve your overall
credit rating.
Getting a Car Loan
with Bad Credit: 4 Steps
1. Contact Equifax,
Consumerinfo, or TrueCredit online for your credit score
or to make sure there are no errors on your credit report.
You can usually dispute the incorrect information online
or over the telephone. If you have correct unfavorable
information, you can write a letter to the company that
reported the unfavorable information, asking them to
remove that information or make a note that your accounts
are now in good standing. Usually they won't do this,
but it doesn't hurt to try.
2. Determine your
credit score (also called a FICO score). There are simple
online guidelines for estimating your credit score yourself.
Still, to get a truly accurate score, you need to purchase
it from the credit bureaus.
a. Note that each
bureau may have a slightly different score (and possibly
a very different score if they have information the
others do not). There are online credit-monitoring services
that will provide you a single report with all three
reports and credit scores.
b. A score of over
680 out of 850 will get you a low-rate auto loan. Under
680 will mean a higher rate but a loan is still quite
likely. Bad credit begins around 650 and lower. You
will be charged high interest no matter where you go,
and may not qualify for as large a loan. But it will
still be a loan nonetheless.
3. Look on the Internet
for names of lenders that specialize in bad credit car
financing. They can be private lenders, car dealers
or any website offering this type of loan help. Compare
the rates and terms with what your own bank offers.
Make a short list of lenders with good rates and terms.
4. Call up the lenders
and ask them about their credit guidelines. They will
often be reluctant to state a single FICO score, but
you can sometimes get them to tell you a range. It’s
important to make sure you have a fighting chance at
approval before applying. A bunch of rejected loan applications
will look bad on your credit report--creating a vicious
cycle that makes it even harder to get a loan.
Bad Credit Car
Loans: A Typical Story
Stephen got a credit
monitoring service to provide him with his reports from
the three credit bureaus, as well as their three FICO
scores. He was shocked to find his credit score was
560. He was reported as having defaulted on one of his
students loans, which was incorrect. He was able to
get that removed quickly. But his credit rating was
still well below 650.
What should Stephen
do now? Of course, Steven should work to repair his
credit rating:
• Pay all
bills on time.
• Stay at
the same address and the same job for a few years if
at all possible.
• Contact
the lenders who reported negative information to the
credit bureaus to see if they will remove it or amend
it to emphasize that his accounts were eventually returned
to good standing.
But in the meantime,
Steve needs a car loan. His job isn’t a on a bus
route and he can’t pay cash. After careful research
on the internet, Steve finds he could get a high-interest
bad-credit auto loan. The loan will also give Steve
another chance to restore his credit.
To take a bite out
of the interest, Steve gets a friend of his who’s
a mechanic to help him find an inexpensive but reliable
used car—which means a smaller loan and therefore
smaller interest payments. He also dips into his savings
and 401(k) to pay as much up front as he can, since
the interest on the car loan will outpace the interest
he could earn on these accounts.
Five years later,
Steve’s credit rating is as good as gold and he
trades his used car in for the car he always wanted.
What will you be
driving in five years? If you plan well and get the
best deal possible on your bad credit car loan, you’ll
go far whatever you’re driving.
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