Smart Spending

Getting an Auto Loan When You Have Bad Credit

Anyone who has read a newspaper or watched television news knows that lenders are not lining up to make auto loans when you have bad credit. If your car is past repair, it is a challenge to get financing for a new car with bad credit. However, it is not impossible and car buyers must manage their expectations.

First an Overview

Folks with bad credit cannot afford to drive brand new luxury cars. They are too expensive and the payments on a new luxury car for a person with bad credit, assuming they could finance, are crushing. So, consider buying an inexpensive new car or, even better, a used car.

More and more often, used car buyers can find a car that covered by the manufacturer’s warranty. The good news is that the quality of these cars, such as Hyundai and KIA rival that of other carmakers. These two manufacturers offer very long warranties, 10 years or 100,000 miles, and have entry-level cars that are relatively cheap. Find used models and they cost far less.

Subprime Lenders Retuning

The New York Times reported recently that sub-prime lenders such as Capital One and GM Financial are again soliciting loans to folks who have far less than perfect credit. These and companies like them have always been a source of loans to those with impaired or no credit – but, the article says that traditional lenders such as HSBC and JPMorgan Chase are among major lenders putting their toes back into the waters of subprime lending too.

Many observers fear that the financial institutions and banks are slipping back into their before the great recession patterns of reckless lending. However, industry spokespeople deny that, claiming that there is a great difference between chronic deadbeats and fallen “angels.” A fallen angel is a borrower who had a good credit record before the great recession and damaged credit today.

Of course, as these loans, if paid, are immensely profitable due to the high interest rates they carry, it is understandable why financial companies want to begin making them again.

So, if you had a good or great credit score before you could consider a loan from a bank. Be prepared to pay a higher interest rate. But, if you have not had a bankruptcy and make your payments on time, and in full, you may be able to refinance the loan after six months or a year at a better rate.

If the banks turn you down contact GM Finance or Capital One and find out what dealers near you they work with.

Second Chance Financing

Many dealerships also offer “second chance financing” for people with bad credit. A simple online search will identify these dealers and many offer an online application for pre-approval. Usually, these dealers can finance a used car; however, they sometimes can put you into an inexpensive new car. Remember though, because of high interest rates your payment will be higher and your loan for a long term, up to 60 months. Additionally, lenders are forcing buyers to install locator and locking devices so that if you fall behind on payments the car will be disabled and located for recovery. Most finance companies pay for this but make it a condition of the loan.

The last resort to get a car is a “buy here/pay here” dealership. Car selections are not great and frequently the cars have no guarantees, you buy them “as is.” It is a good idea to take a car that you are buying without a guarantee to a mechanic and have it checked out.

It is possible to get a car loan with bad credit. You need determination to find a lender or a dealer that can connect you with one. You need recognition of the fact that you most likely cannot afford the car of your dreams and will pay top dollar for a car that you finance with a high-interest loan. Make the payments faithfully and your credit score will improve. You may even be able to refinance at a better rate down the road.