Bad credit is a problem that can affect everything from buying a house to being approved for an auto loan. It can leave consumers feeling stressed and anxious, and if a consumer is approved the interest rates can often double or even triple the total amount of the loan. Consumers can recover from bad credit problems and even purchase a vehicle without having to pay extremely high interest rates if they are willing to spend the time to properly do their research. In this guide you will find the information you need to find an auto loan that will put you back behind the wheel, without feeling like you were "taken to the cleaners."

The first step to securing an auto loan when you have bad credit is to thoroughly research all of your available options. With the sheer number of financial institutions offering a variety of auto loans at varying interest rates, even those with absolutely no credit have a chance of being approved. To help you understand the complexities of a bad credit auto loan we encourage you to read this guide before you sign on any dotted line.

Many consumers do not know that as recently as 2008 some automotive financial loan institutions were arguing against a federal proposal that would place mandatory term limits on all auto loans. The reason this should concern potential car buyers is that when dealerships are allowed to set their own term limits on individual auto loans it is easier for consumers to be able to afford the vehicle that they want. When the dealerships have the flexibility to offer consumers 60, 62 or even 72 month loans, payments are smaller making vehicles more attractive and affordable. This not only benefits the dealerships since they are able to sell and lease more vehicles but also consumers, especially those with bad credit.

Auto loans have been in existence for over 90 years, beginning initially to ensure every consumers was able to exercise their "right to drive", as stated by Henry Ford. The federal government was worried then that these auto loans were encouraging consumers to mismanage their money, and that is still a concern today.

If term limits are set on auto loans the shorter proposed 62 month repayment period can put a new or gently used vehicle out of many consumers' reach. With fewer vehicles being sold the automobile industry will quickly face the same uncertain financial future that caused its economic collapse in the mid 1980's.

Not only did the automobile industry suffer devastating losses but it rapidly began to affect other economic sectors, and some are still recovering over 25 years later. As long as dealerships are allowed to set their own term limits on automobile loans, even consumers with credit problems will find that it is possible to purchase a vehicle that is dependable and one that they will be proud to be seen driving in.

Reference:

• Automotive Financing and the Pursuit of Happiness

When the first automobile rolled off of the assembly line the majority of Americans thought that it would just be a passing fad for the rich to enjoy. No one thought that cars would ever become popular or be able to replace the horse and buggy. One hundred years later it is difficult to find someone over the age of 16 who doesn't have their drivers' permit, and almost every American adult has owned at least one car or truck in their lifetime. Automobiles have not only replaced the horse, for most consumers it is their primary mode of transportation.

Evidence of loans can be found as far back in history as 3,000 B.C. and the basic principle remains unchanged. Payments are still made on a prearranged date and scheduled to end once the loan has been repaid by a specific time. On occasion collateral can be used, but this is also a different type of loan. Before the invention of the automobile loans were typically centered around homes and necessary farming equipment, which often included horses.

Once the popularity of automobiles started to grow financial institutions began to realize that there was a new market opening up for them to take advantage of. This only intensified once Henry Ford declared that it was everyone's right to own a car and began to mass produce the automobiles at an affordable price. With automobiles now in a price range that the average middle class citizen could afford, financial institutions began lending money to almost anyone that walked through the door. Times have changed and it is a little harder now to get a car loan, especially if you have bad credit.

Reference:

• When did people first start using collateral to secure loans?

If you are dealing with the hassles that come with having bad or poor credit it can be almost impossible to see how there can be any benefits associated with receiving an auto loan, other than the fact that you now have a car. While no one wants to have bad credit, it is more common than what many consumers think. The country is still recovering from several national and global financial upsets. Major economic sectors have suffered serious financial setbacks in the past twenty years, and during this period a majority of Americans were living solely on their credit. Over time this often lead to an inability to repay back all of the debt, and consumers started to see their credit ratings starting to fall.

Lower credit ratings equal significantly higher interest rates and it can even cause some financial institutions to say "no" outright to any request for a loan, regardless of its size. Not only does this make it almost impossible for consumers to purchase an automobile, but also for any other large purchases. Depression, feelings of failure and anxiety are common in these situations, and some consumers can even have their health affected by an inability to receive the financial help that they need.

Even though it can seem impossible right now an auto loan can help consumers start to rebuild their credit ratings, even if they have declared bankruptcy. The loans available to you will often come with higher interest rates, but sometimes it is worth the added expensive if you want to drive and rebuild your credit rating. While it will take time, generally seven years or more, you can start to improve your quality of life with a bad credit auto loan. You will also have the benefit of being able to drive around town, which can open up a whole new world of possibilities for you to take advantage of.

Reference:

• Secrets to Getting an Auto Loan if You Have Bad Credit (pg. 11, sec. 9)
• Buying a New Car When You Have Bad Credit

A bad credit auto loan is really not that different than other types of credit, except that it typically comes with a higher interest rate. This is due to the fact the loan applicants with poor or bad credit are generally considered to be at a higher risk than those with a higher score. Even though it might not seem fair that you have to pay more simply because you had a few late or missed payments, it is important to remember that the financial institutions also need to protect themselves.

The higher interest rate that you are paying helps to ensure that the bank doesn't lose all of its money in the event you are unable to repay the bad credit auto loan.

Along with bracing yourself for having to repay the loan with a higher interest rate than others some other basics you need to be prepared for will include the lending institution doing a full search on your credit history, along with factoring in any potential down payment or trade in that could be added into the loan. You will need to be able to make an initial down payment, even if you have a vehicle to trade-in, and the amount required will vary according to the institution, your credit history and any valid trade-ins. This is also the time you will want to start doing your research.

Car buying experts also recommend having your preapproved financing already to go, before you step foot in the dealership. Car dealerships also offer onsite loans, but interest rates will be extremely high. The interest on automobile loans is the primary source of income for dealerships, especially those who are dealing with bad credit scores. Not only does the dealership get the vehicle back to be resold, they also get to keep all of the money that was repaid. Even if a dealership seems like your only option it still makes sense to apply for a bad credit auto loan from a federally insured financial lending institution.

Reference:

• Secrets to Getting an Auto Loan if You Have Bad Credit (pg. 11, sec. 9)
• Buying a New Car When You Have Bad Credit

If you have a utility bill in your name or even some type of insurance, you have a FICO credit score.

Most credit scores are started during college, and this is also where problems are likely to occur. Incoming students are inundated with offers for credit cards, and very few check to see how high the interest rates are. In between paying for books, school and an occasional night out with friends, most college students find that it is impossible to pay back their credit card debt. Even though financial institutions expect this, hence the higher interest rates, it can still have a devastating effect on your credit score for years to come.

Life's "ups and downs" can also be hard on credit scores. Medical bills, child rearing expenses and job losses can all affect your credit score, and one missed payment can stay on your report for up to seven years or longer. When credit scores start to drop interest rates on automobile loans generally start to go up, and if the situation is bad enough if can make it difficult to even secure the financial assistance you need.

Before you apply for an auto loan it is important to know your credit score and there are three main reporting bureaus that financial institutions use. While TransUnion, Equifax and Experian all use a different method to calculate your credit score the numbers all mean the same basic thing. Poor and bad credit scores are under 550, and this means that you are going to have to do a little research if you want to find an automobile loan without abnormally high interest rates.

Reference:

• Bad Credit Auto Loan

It cannot be stressed enough how important your FICO score is, especially when you are applying for a bad credit auto loan.

While it is always recommended that you improve your credit score before applying for a car loan, lending institutions understand that this is not always possible. There are ways that you can improve your credit score when you are repaying your auto loan, but first you need to understand what information it includes.

Length of past and present work history is always factored into a credit score, and a long and steady employment record can help to offset a little of the damage one missed or late payment can have. It should be noted that the majority of your credit score is comprised of your payment history and your current amount of debt so any little bit of help can have a major affect on the proposed interest rates. The length of your credit history is also factored in, and if you have consistently maintained at least one open banking account this will be factored into your score.

Even though this may not benefit you at the moment, it can ensure that the next automobile loan comes with lower interest rates. While having several open lines of credit can be positive, it can also negatively affect your score. The time that the credit lines were open is factored in, and if all were started at once it can cause financial institutions to reconsider the offer of even a high interest loan. Opening several lines of credit in the same period often looks "desperate" and can give the impression that you won't be able to make all of the payments on what you already owe, this often results in financial institutions considering you too much of a high risk and refusing to offer you an automobile loan.

Reference:

• How to buy a car with bad credit

When you have bad credit equity can be a problem and this can affect your ability to get an automobile loan with a reasonable interest rate. Equity typically refers to the current Kelley Blue Book value of your vehicle, and it will vary depending on several factors. Year, make, model, number of recorded miles and even service record will all play a role in its Blue Book value. The latest copies of the Kelley Blue Book are available online and in most local libraries so you can easily perform the research yourself without relying on the honesty of the potential lending institution. While adding in the current value of the vehicle to the initial down payment can improve your chances of being approved for a lower interest automobile loan there are a few other aspects to consider.

If you still owe on your current vehicle it probably will not make sense for you to include it as potential equity. According to tips published by the DVM organization:

The remaining amount owned on the trade in is typically added to the new loan which can result in higher interest rates and payments. If you really do need another vehicle, even when you are still paying off the first one, Consumer Reports recommends keeping the two transactions separate. This will help to keep your interest rates at a lower level, and you can still use the equity in the original vehicle once it is paid off in full.

Reference:

• Car Financing Guide

On occasion a co-signer can improve your chances of being approved for an automobile loan, but there it is important to know when to use one. Most lending institutions only want to deal with a co signer on a loan in two specific circumstances, and using one simply because you have bad credit can actually make it harder for you to be approved.

If you are a college student and only have a limited activity on your credit report, having a well established and financially secure family member co sign on the loan application will improve your chances of being approved for an automobile loan. This will help you and your relatively build a strong credit history which will continue to benefit you throughout your life.

The addition of a co-signer can give financial institutions the assurance they need that you will be able to repay the loan on the prearranged date. Since your issue is not with income but bad credit having a co signer is typically not advised according to Consumer Affairs.

Reference:

• How to buy a car with bad credit

Even though Henry Ford stated that every American should be able to own an automobile, this does not necessarily mean that it should be the most expensive one on the lot. Car dealerships will be eager to entice potential buyers into adding plenty of extras, which also causes the final cost of the vehicle to steadily climb with each new feature, function or gadget.

While this may not seem like it makes a lot of sense, in the long run it is financially sound advice. The bad credit auto loan is already charging higher interest rates, and this can increase when the usual maintenance requirements on older vehicles are factored in. Newer cars also have a higher resale value which can translate into more equity than next time you need to apply for an automobile loan.

Reference:

• How to buy a car with bad credit

Unfortunately bad credit also puts you at risk for being caught on a potentially expensive scam that can also make it impossible for you to get a fair interest rate or even be approved for the loan. In most instances these problems occur at "pay here" car dealerships, but consumers can be potentially scammed almost anywhere.

If a deal sounds too good to be true, it probably is. You also want to watch out for the "add-ons" that can cause the overall price of the vehicle to skyrocket. Never sign any contract without reading it carefully, especially the fine print. To ensure that your problems with bad credit are not made worse by a potential auto loan scan it is always best to deal with a federally recognized bank, credit union or similar financial institution.

Reference:

• Car Financing Guide