• Bad Credit Car Loan: Key Tips for Getting Approved and Avoiding Pitfalls

    Getting a bad credit car loan is a bit more difficult these days but it’s not impossible. If you have bad credit but are in need of a new vehicle, there are still ways to get approved for a loan. Buying a car can be stressful and adding a bad credit rating to the mix can make the whole process seem impossible.

    Below are a few tips to help you find the perfect loan for your situation.

    Be Realistic

    It is important to be realistic when looking for a bad credit car loan. More than likely you will not qualify for the type of vehicle that you really want. A new car will be out of the question unless you have a significant down payment and a co-signer.

    Credit Report

    Check your credit report before you going shopping. Verify that there are no errors on the report and if there are, get them corrected. You should review your credit report on a yearly basis. Experian and Annual Credit Report offer a free copy of your credit report on an annual basis.

    Get your paperwork together before you approach a bank or finance company. They will require copies of a driver’s license, payment stubs, car insurance, bank statements and personal references. Be prepared to share the details of your monthly bills. The bank will need to understand your complete financial picture.

    No Credit Check Dealerships

    There are car dealerships that work with credit challenged people. Look in your local yellow pages or do an Internet search to find a dealership in your area. These dealerships often have relationships with banks that are willing to lend to bad credit customers. Be sure to read all documentation when getting a loan. Expect to pay high car loan rates, but do not agree to anything outrageous.

    Interest Rates

    Your initial rate will be quite high. Look for loans that can be refinanced to a lower rate after a year or two. Use this time to get your credit rating in better shape and refinance to a better rate.

    The bigger your down payment is, the better your interest rate. If possible, aim for 10 to 20 percent.


    If you have a co-signer with a good credit rating this can help you get a loan or a better rate on the loan being offered. This person will be on the hook if you don’t make the payments, so be sure they understand the commitment they’re making.

    There are plenty of shifty operators that take advantage of people with poor credit. It can often feel like there is nowhere else to turn but don’t become the next victim. Be vigilant of these questionable tactics as you proceed with your hunt.

    The High Interest Loan

    In general, a lower credit score for a borrower allows lenders to jack up interest rates quite a bit, since the high risk car loan represents a greater risk for the lender. If they offer you a bad credit car loan, look at the interest rates. Avoid signing just any car loan agreement and demand that lenders keep your interest rates low.

    Quick Loans and Short Payment Cycles

    Some types of personal loans are made to trap consumers. They offer easy loan options to people with bad credit, in exchange for high interest rates and short repayment terms. Some of these types of loans include many auto pawn loans or auto title loans, as well as certain types of payday advance loans. Look at the repayment term for your loan and what happens after it’s over, when lenders may jack up interest rates and otherwise trap you in debt.

    Long-Term Loans and Negative Equity

    Other lenders like to offer long-term loans to customers with bad credit. They give you the option of paying smaller monthly payments over a much longer period of time. However, this can be a terrible deal for a car buyer whose vehicle will depreciate. Someone who does much more than their car is worth after several years in an auto loan is said to have “negative equity” in a vehicle. With additional costs for repayment, insurance, mechanical repairs and maintenance, and more, this situation can be very costly. Try to keep your loan repayment term to two or three years to prevent this kind of long term situation that some personal finance experts see as lenders slowly “bleeding” a borrower.

    Obstacles to Refinancing

    After several months in an auto loan, when you make payments on time, your credit score will improve, and you’ll be eligible for refinancing to lower your interest rates. However, some lenders slip in clauses that will restrict your access to refinancing. Stay away from these kinds of deals, and choose lending agreements that allow you the freedom to refinance for lower total payments over time.

    The Cosigner Bait and Switch

    Another major danger in a bad credit auto loan is that a dealer or other lender may pressure you to find a cosigner. A cosigner is someone who puts their name onto someone else’s auto loan in order to use their good credit history to secure lower interest rates. However, some consumer advocate groups report that lenders are sometimes tricking both parties by using complicated paperwork to title the vehicle to the cosigner. This generally ends up being a hassle for the buyer and the cosigner, so watch out for this kind of agreement.

    Finding a car loan when you have bad credit can be difficult but these tips should help make that search a bit easier.