Bad-credit car loans carry a higher risk to the lender, so the borrower must pay a higher than usual interest rate. You probably will need to apply to more than one lender and give more documentation. Still, a bad-credit loan is worth the trouble because it not only lets you get the car you need and want, but can also help improve your overall credit rating.



Getting a Car Loan with Bad Credit: 4 Steps

1. Contact Equifax, Consumerinfo, or TrueCredit online for your credit score or to make sure there are no errors on your credit report. You can usually dispute the incorrect information online or over the telephone. If you have correct unfavorable information, you can write a letter to the company that reported the unfavorable information, asking them to remove that information or make a note that your accounts are now in good standing. Usually they won't do this, but it doesn't hurt to try.

2. Determine your credit score (also called a FICO score). There are simple online guidelines for estimating your credit score yourself. Still, to get a truly accurate score, you need to purchase it from the credit bureaus.

a. Note that each bureau may have a slightly different score (and possibly a very different score if they have information the others do not). There are online credit-monitoring services that will provide you a single report with all three reports and credit scores.

b. A score of over 680 out of 850 will get you a low-rate auto loan. Under 680 will mean a higher rate but a loan is still quite likely. Bad credit begins around 650 and lower. You will be charged high interest no matter where you go, and may not qualify for as large a loan. But it will still be a loan nonetheless.

3. Look on the Internet for names of lenders that specialize in bad credit car financing. They can be private lenders, car dealers or any website offering this type of loan help. Compare the rates and terms with what your own bank offers. Make a short list of lenders with good rates and terms.

4. Call up the lenders and ask them about their credit guidelines. They will often be reluctant to state a single FICO score, but you can sometimes get them to tell you a range. It's important to make sure you have a fighting chance at approval before applying. A bunch of rejected loan applications will look bad on your credit report--creating a vicious cycle that makes it even harder to get a loan.

Bad Credit Car Loans: A Typical Story

Stephen got a credit monitoring service to provide him with his reports from the three credit bureaus, as well as their three FICO scores. He was shocked to find his credit score was 560. He was reported as having defaulted on one of his students loans, which was incorrect. He was able to get that removed quickly. But his credit rating was still well below 650.

What should Stephen do now? Of course, Steven should work to repair his credit rating:

• Pay all bills on time.

• Stay at the same address and the same job for a few years if at all possible.

• Contact the lenders who reported negative information to the credit bureaus to see if they will remove it or amend it to emphasize that his accounts were eventually returned to good standing.

But in the meantime, Steve needs a car loan. His job isn't a on a bus route and he can't pay cash. After careful research on the internet, Steve finds he could get a high-interest bad-credit auto loan. The loan will also give Steve another chance to restore his credit.

To take a bite out of the interest, Steve gets a friend of his who's a mechanic to help him find an inexpensive but reliable used car—which means a smaller loan and therefore smaller interest payments. He also dips into his savings and 401(k) to pay as much up front as he can, since the interest on the car loan will outpace the interest he could earn on these accounts.

Five years later, Steve's credit rating is as good as gold and he trades his used car in for the car he always wanted.

What will you be driving in five years? If you plan well and get the best deal possible on your bad credit car loan, you'll go far whatever you're driving.