Car Buying

5 Tips for Financing a Car With Weak Credit

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author photo by Russ Heaps May 2017

For consumers with weaker credit, financing a car is a challenge, but not necessarily impossible. Sure, according to credit expert Experian, as a percentage of all car loans, loans to nonprime and subprime borrowers were down at the end of 2016 from 2015, but still more than 43 percent of all new and used car loans were made to nonprime-, subprime- and deep subprime-rated consumers

Although lenders have varying definitions qualifying a borrower as nonprime or subprime, Experian identifies nonprime as anyone with a credit score below 660 and subprime at 600 or below. Usually subprime borrowers have a major ding somewhere in their recent credit history, such as loans in collection, bankruptcy or a home or car repossession. Lenders view such borrowers as high-risk.

You may not have a strong credit score, but that doesn't mean you can't secure a car loan. The market is always changing. Even if you were turned down for a car loan a year ago, you might qualify now. Here are five steps to improve your chances for financing a car and getting the best interest rate possible:

1) Obtain Your Credit Score

Your credit score is a snapshot of your credit worthiness at any given moment. It can change from week to week, or month to month. If you haven't checked it in the past six months, do so before shopping for an auto loan. It's the first piece of information a lender considers and serves as the best tool to determine your credit status, as well as the interest rate for which you qualify. There are a number of sources for obtaining your score, such as Experian's Free Credit Score. WalletHub.com now provides free credit scores, as well as credit reports that are updated daily -- all you need do is register.

2) Obtain Your Credit Report

While a credit score is a snapshot of your current credit health, a credit report provides your credit history, e.g. loans you've had and whether you pay on time. It will also show any loans that have gone into collection, bankruptcy and repossessions. Three major credit information agencies -- Experian, TransUnion and Equifax -- collect information from lenders to build your report, which they supply to lenders upon request. You need to know what is in your report before a potential lender sees it. You have a right to one free report per year from each agency.

3) Polish Up Your Credit Report

Never take for granted that lenders have provided the three credit-reporting agencies accurate information. They do make mistakes. Each agency has its own established procedures for disputing misinformation. When you find an error on your credit report, dispute it with the reporting credit agency yourself. This must be done individually with each agency where the misinformation appears. They don't talk to one another.

This is also the time to do whatever you can to clean up any legitimate negatives on your report. Pay off balances in collection, and pay all accounts so they are up to date.

4) Produce a Hefty Down Payment

Anyone under financial stress will probably struggle to come up with a decent down payment; but the more "skin" you have in the deal, the more likely it is that a lender will take a chance on you and maybe even charge a lower interest rate. Lending is all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you will be to default on the loan. Whether it's a home mortgage or a car loan, lenders view 20 percent as a reasonable down payment. You may get away with less. If your credit is really weak, however, putting down more will help convince a lender you are serious about your finances and further improve your chances.

5) Shop for Your Loan

No matter how weak you think your credit is, it just may be better than you think. Before ever setting foot on a dealer's lot, you should approach a variety of lenders with the goal of getting pre-approved. Understand that although finance companies are probably your best bet for securing a subprime loan, banks and credit unions are looking more favorably on borrowers with less-than-sterling credit. Don't rule them out in your search.

Even the lending division of some carmakers, such as GM Financial, are open to financing a car for those with weaker credit. You will have to apply with these carmaker-owned finance companies at the dealership, but still shop around so you have a ballpark idea of the interest rate to expect.

What it means to you: Even if your credit is a little banged up, you may find financing a car is easier than you think.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
5 Tips for Financing a Car With Weak Credit - Autotrader