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Buy A Car With Bad Credit

06 Jun

Buying a car with bad credit in today’s market is rarely a pleasant experience. If you’re like most of today’s buyers your credit is less than stellar. But don’t be discouraged. Even if you have bad credit, you can buy a car. You will pay a higher rate of interest and higher payments than your prime credit friends, but you can buy a car with bad credit.

If you have bad credit and apply for a car loan, it may become necessary to lower your sights a bit and settle for that compact instead of the nice sedan you have your heart set on. To qualify for financing, try to find a car with monthly payments under 16% of your total monthly income.

Lending companies use a computer scoring system that spits out numerical values based on things like the length and type of your employment, how long you have lived at your residence, whether you rent or own, if you have both checking and savings accounts and other “lendability” indicators. They even pay attention to how well you complete your application. Before applying, you should walk into their office with a list of references complete with addresses and phone numbers. You should know who you owe, how much and have account numbers and contact information at hand.

The first thing to do before you buy a new car with bad credit is to find out just how bad your credit is. Lenders base your credit rating on your FICO score. Your FICO score is an average of the scores of the three main credit reporting agencies’ (Equifax, Trans Union and Experian) information. You could go to the agencies yourself but FICO averages the information from all three, analyzes it and provides valuable information about your score and the items causing your credit rating to score low. You can find out your FICO score by going online to http:www.MyFICO.com. This is what you might expect from FICO:

FICO® Score APR Monthly Payment (Approximate)

720-850 5.9 – 6.2% $303+
690-719 7.5 – 7.8% $311+
660-689 9.5 – 9.8% $320+
620-659 13.3 – 13.6% $338+
590-619 18.1 – 18.4% $362+
500-589 18.6 – 18.9% $364+

These figures are based on the national average and are accurate as of January 5, 2010 on a loan amount of $10,000 for a 36-month term. Source: Informa Research Services

If you have bad credit you may be unable to obtain a car loan through a bank or normal finance company. Many lending institutions and reputable finance companies only lend to customers with the best credit ratings: Prime, Good or Marginal. If you have poor, Bad or Very Bad credit you may be forced to consider a dealer or service company that is designed to help people buy a used car with bad credit.

The following credit scores are approximations and may vary from lender to lender.

720+ Prime Credit
680+ Good Credit
640+ Marginal Credit
600+ Sub-Prime Credit
580+ Poor Credit
525+ Bad Credit
480+ Very Bad Credit

Using the dealer or service company that caters to buyers with poor credit situations saves time and reduces the number of inquiries into your credit, which in itself can affect your credit rating.

If your credit score is less than 600 find a dealership or check online for a service that specializes in bad credit situations. This is particularly advisable if you have filed a bankruptcy or defaulted on other credit arrangements.

There are also some other traditional ways to get auto financing with bad credit. You can ask a family member to co-sign for you. With this arrangement, the family member with good credit co-signs your loan, agreeing to pay for the car if you default on the payments.

You might also want to contact a mortgage lender about the possibility of financing a car if you have some equity in your home or some real estate. The catch here is that if you default on the car loan you could lose your equity or real estate to satisfy the car loan.

Another option for someone who wants to get bad credit car finance is to check around for someone who is in a “must sell” situation. Often sellers will let their cars go to someone who is willing to take over their payments.

Finally, ask your dealership if they offer “recourse loan” financing. With this type of loan, the dealer acts as the co-signer on the credit application and as borrower in the bank’s records. This is a last resort move because the terms are normally in the dealer’s favor and a higher down payment and interest rate are demanded.

The long and the short of it is that you can get an auto loan refinance with bad credit. It will simply cost you more to do it.