Although lenders have various definitions for subprime, credit expert Experian identifies anyone with a credit score below 620 as a "subprime borrower". Usually, these borrowers have a major ding in their credit history, such as loans in collection, bankruptcy or a home or car repossession. Lenders generally view subprime borrowers as higher-risk. But that doesn't mean that financing is out of the question if you fall into this category.
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:
Know Your Credit Score
Your credit score is a snapshot of your credit-worthiness. It can change a bit from week to week or from month to month. If you haven't checked your credit in the past six months, do so before looking into 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 you'll qualify for. You can obtain your score at www.freecreditscore.com.
Get Your Credit Report
While a credit score is a snapshot of your current credit health, a credit report provides your full credit history: loans you've had and whether you pay on time. It'll also show any loans that have gone into collection, bankruptcy and repossessions. The three major credit bureaus -- Experian, TransUnion and Equifax -- collect information from lenders to build your report, which they supply to lenders upon request. You need to know what's in that report before a potential lender sees it.
Clean Up Your Credit
The information that lenders provide to the three credit bureaus isn't always accurate. Each agency has its own way of gathering and reporting information, and each agency has a different protocol for correcting anything that might be wrong. If you find mistakes on your credit report, dispute them with the reporting credit bureau directly. You mayl 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 and the more likely they'll be to offer you 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'll be to default on the loan. Whether it's a home mortgage or a car loan, lenders see 20 percent as a reasonable down payment. You may be able to negotiate 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. 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 to find a loan, let alone someone with weak credit.
Do the research. if possible, secure a 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.
A final tip: Be realistic about what kind of car you need and what you can afford. Don't buy more car than you need to. Everyone wants to drive around town in the coolest car with the best rims and the thumpin' stereo. But, maybe just maybe, if you're repairing your credit, it might make sense to start with something more modest. There's always time to live the high life tomorrow, once your credit is back on track.