Bad credit doesn't always lock you out of a car loan
By Lucy Lazarony • Bankrate.com

Worried that your less-than-perfect credit is going to keep you from buying the car you want?

Don't be.

Chances are you will be able to land an auto loan. Today, banks, credit unions and finance companies are all making loans to people with flawed credit. Many people who wouldn't qualify for an auto loan five years ago can get one now.

"They've loosened credit standards to the point that anyone can get a car," says Art Spinella, president of CNW Marketing Research in Bandon, Ore. "It's banks. It's finance companies. It's everybody."

Work to save money
How good a deal you get will depend on how many bumps you have on your credit and how much work you're willing to do before setting foot in an auto dealership.

Remember, dealers want everyone to buy their cars, and that includes folks with dinged or damaged credit. So in addition to offering financing from a manufacturer's finance company, such as GMAC and Ford Credit, they also have financing deals with banks, credit unions and finance companies. You may not get the best rate out there, but they'll get you in a car.

But also remember, dealers take a cut of all financing deals they land. So a loan from ABC Bank through the dealer may have a higher interest rate than the loan you'd get if you applied to ABC Bank on your own.

Interest rates on loans for folks with bad credit range from 10 percent to more than 20 percent. The key to landing a better rate is to shop around.

Check credit report for mistakes
Before you start comparing rates, be sure to get a copy of your credit report. Check to see that all information is accurate and up-to-date. The last thing you need is to get bumped up to a higher rate because of an error.

When shopping for auto loans, be sure to swing by your bank or credit union.

"The broad trend among banks is to service customers almost regardless of their credit standing," says Tim Cook, director of communications for Independent Community Bankers of America, a national trade association for community banks. "They do not want to turn a customer away, particularly if it's a customer with a checking account or another relationship."

A larger bank may have a whole department devoted to lending to people with flawed credit or they may have a relationship with a company specializing in subprime lending.

Smaller banks are more apt to approve loans to folks with credit woes on a case-by-case basis. The more accounts you have at the bank the better the chance they'll be willing to work with you. The same goes for credit unions.

Meet the banker face to face
It's a good idea to apply for an auto loan in person. Screw up some courage and look the loan officer in the eye. Be upfront about the problems you've had in the past. Did a divorce, illness or accident throw you off track? Let them know.

"I've had people come in and say 'I know I had some problems in the past and I want to tell you about it' -- I like those people," says E.C. Williams, chair of the lending council for the Credit Union National Association and senior vice president of MacDill Federal Credit Union in Tampa, Fla.

"It speeds things up. You've got eyeball-to-eyeball contact. You've got the ability to address any glitch at that moment in time."

That "glitch" may have been a Sears bill that you paid 30 days late when you were between jobs. Those details can make a difference. And that's information that a loan officer can't get from an online application or application referred to them from a dealer.

When it comes to auto financing, credit unions have had a reputation of delivering low-interest rate loans to members with good credit. But that's beginning to change. While some credit unions still have an all-or-nothing approach to financing -- you either qualify for a low-interest rate loan or you don't -- others are offering a range of rates. This tiered approach to loan pricing allows credit unions to offer loans to members with all levels of credit.

The practice of offering a range of auto loan rates, known as risk-based pricing, is common among banks and finance companies as well.

Line up financing first, then shop
So auto loan choices for people with dinged credit are out there. It's just a matter of tracking them down.

Start early: Applying for financing before you start car shopping will also help you narrow your auto search. Finding out how big a loan you qualify for and at what rate can help you determine what kind of car you can realistically afford.

When it's time to hit the dealership, consumer experts urge folks to look at an auto purchase as three separate negotiations: the price of a car, the price of a trade-in and the financing. A car salesman will try to lump this stuff together. Don't let him.

"It's kind of like a shell game. They'll move the profit around so you won't be able to find it," says Jean Ann Fox, director of consumer protection for Consumer Federation of America.

Blinded by the interest rate
It's easy to get talked into a bad deal. For example, you may be so thrilled at the interest rate the dealer is quoting on the loan that you may not notice when the purchase price of the car gets bumped up.

"We've seen people pay $2,000 over blue book," Fox says.

Avoid spot delivery: Some dealers will urge you to go ahead and take the car home while they complete the financing. Don't do it. There's a good chance that they could come back and tell you that they couldn't get the financing deal they promised you. You may have to cough up a bigger down payment or pay a higher interest rate or both.

Be sure to get a used car checked out by an independent mechanic.

"If they don't let you do it, that may be a warning sign and you may want to go somewhere else," says Steve Rhode, president of Myvesta, a nonprofit debt crisis center.

Visit "buy here, pay here" car lots as a last resort. These lots, while specializing in customers with problem credit, have some of the highest auto prices and auto financing rates around. Don't sell yourself short.

"A lot of people assume the worst and don't try," Fox says. "You shouldn't give up without trying to see if you can get a loan at a more favorable interest rate."

-- Updated: June 7, 2004