Bad Credit Car Buying in 3 Steps

If you have bad credit, buying a car may seem difficult, if not impossible. However, there are several ways by which you can obtain a bad credit auto loan. Here are three simple steps:

1. Clean Up Your Credit

Of course, you say. But even if you will be buying a car just three months, it is a good idea to make an effort now. First, request a copy of your credit report by writing to the Annual Credit Report Request Service (P.O. Box 105281, Atlanta, GA 30348-5281). Alternatively, you may order your credit report online through a web site like Annual Credit Report.

Your credit report will usually arrive from a major credit reporting bureau like Experian, TransUnion or Equifax. The report should not cost you anything; obtaining a free credit report once every 12 months is even mandated by the Fair and Accurate Credit Transactions Act (FACT Act). However, obtaining a credit report with a calculated credit score does cost additional money.

Once you receive your credit report, carefully look over it and note any credit or payment discrepancies. If any discrepancies are found, call the associated credit agency as soon as possible. Also, make sure that your current debts have been paid either in full or through a minimal down payment. It will be difficult to get approved for an auto loan if the auto dealer finds out that you are delinquent on your credit card or other payments.

2. Obtain Pre-Approval

Obtaining a pre-approved auto loan is the most difficult part of buying a car. However, having a pre-approved auto loan will eliminate the pressure and expense of dealer financing. Also, pre-approval allows you to take advantage of lower interest rates, rebates and other car dealer discounts. In order to obtain a bad credit auto loan pre-approval, you will have to demonstrate your capacity for repaying the loan. Having sufficient employment income and/or monetary savings will help immensely. Secondary forms of income, such as alimony payments and child support, are also useful.

Having a pre-approved auto loan will eliminate the pressure and expense of dealer financing

If you decide to obtain financing through your car dealer, keep in mind that you will be paying the sticker price of the car, plus an additional 7-15 percent of the car price according to your credit rating, liquidity (savings, stocks, etc.) and current earning capacity. While many dealerships do offer a 0 percent financing rate, this rate is often applicable to only those buyers with a stellar credit history and rating.

3. Other Auto Loan Options

Despite your best efforts, it may not be possible to secure a bad credit auto loan. If this is the case, you may try purchasing a used or pre-owned car, which is usually cheaper than a new car. Buying a used car not only saves you a lot of money over the long term, but it also requires a smaller loan. For those consumers with bad credit, a smaller loan is much easier to secure than a bigger one.

You may also want to put down a bigger initial down payment on your auto purchase. Doing this convinces the car dealer that you are serious about the purchase and intend to make full repayment of the loan.

Finally, you may wish to find a co-signer for your auto loan. Make sure that this co-signer has good to excellent credit. If you have a reliable friend or relative who is willing to co-sign your loan, you are much more likely to secure the car loan even with bad credit.

Hally Z.

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