We offer helpful tips to purchasing a car with bad credit.
"More Subprime Car Buyers Approved for Auto Loans" screamed a March 2013 headline in U.S. News Rankings and Reviews, indicating that financing a car for the credit-challenged is getting easier. And indeed it is.
Although lenders have various definitions for a subprime borrower, credit expert Experian identifies as subprime anyone with a credit score below 620. Usually, these borrowers have a major ding in their credit history, such as loans in collection, bankruptcy or a home or car repossession. They are borrowers that lenders view as high risk.
Experian reported that in the first three months of this year, 45.2 percent of auto loans went to subprime borrowers. That's compared to 44.4 percent in the same quarter last year. Likewise, the average subprime interest rate -- the cost of a loan -- dropped from 4.53 percent a year ago to 4.23 percent in the same quarter this year. Both stats show it's a good time for someone with weaker credit to get a loan.
Non-prime borrowers with credit scores between 620 and 679 have also reaped the benefits of looser auto credit, which has steadily improved since early 2010. New-car loans to borrowers with a credit score below 680 were up more than 8 percent for the first quarter of 2013 over the same three months last year.
Even if you were turned down for a car loan a year ago, you might qualify now. Here are five steps to improve your chances for financing a car and getting the best interest rate possible:
Obtain Your Credit Score
Your credit score is a snapshot of your credit worthiness at any given moment. It can change from week to week or month to month. If you haven't checked it in the past six months, do so before researching an auto loan. It is the first piece of information a lender considers. It's the best tool to determine your credit status and the interest rate for which you qualify. You can obtain your score at www.freecreditscore.com.
Obtain Your Credit Report
While a credit score is a snapshot of your current credit health, a credit report provides your credit history: loans you've had and whether you pay on time. It will also show any loans that have gone into collection, bankruptcy and repossessions. Three major credit information agencies -- Experian, TransUnion and Equifax -- collect information from lenders to build your report, which they supply to lenders upon request. You need to know what is in your report before a potential lender sees it.
Clean Up Your Credit
The information lenders provide to the three credit bureaus isn't always accurate. Each agency has established procedures for disputing misinformation. If mistakes exist on your credit report, dispute them with the reporting credit bureau. You will need to do this separately with each credit bureau reporting the misinformation.
Also, do what you can to clear up any legitimate negatives on your report. Pay off any balances in collection and bring all payments up to date. Pay off any small balances that you can.
Produce a Hefty Down Payment
The more "skin" you have in the deal, the more likely a lender will be to take a chance on you while charging a lower interest rate. It's all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you will be to default on the loan. Whether it's a home mortgage or a car loan, lenders view 20 percent as a reasonable down payment. You may get away with less. If your credit is really weak, however, putting down more will help convince a lender you are serious about your finances and further improve your chances.
Building or rebuilding your credit is a big job that you shouldn't hand over to someone else. Unless you have squeaky-clean credit and are applying for one of those no-interest, manufacturer-sponsored financing deals, sitting in the business office of a car dealership is the wrong setting for anyone -- let alone someone with weak credit -- to find a loan.
Do the research and, if possible, secure the loan before you visit the dealership. Understand that while finance companies are probably your best bet for securing a subprime loan, banks and credit unions are looking more favorably on borrowers with less than sterling credit. Don't rule them out in your search.
In 2010, General Motors purchased a subprime lender specifically to boost the number of subprime borrowers among its owner base. It's now called GM Financial and has money to lend. It and other carmaker-owned finance companies can be good subprime financing sources. You will need to apply to these carmaker-owned finance companies at the dealership, but still do some research so you know the interest rate you qualify for.
Don't try to buy more car than you need or can afford. Even if your credit is a little banged up, today's credit market for subprime borrowers is the best it's been in nearly five years.