5 steps to a car loan after bad credit

Tara Baukus MelloGetting a car loan with lousy credit has been a challenge since the economy took a nose dive two years ago. But recent changes show that the tide may be changing for so-called subprime borrowers.

The lending arms of Chrysler, General Motors, Hyundai and its sister company Kia have recently began issuing more car loans to buyers with less-than-stellar credit. For Chrysler and General Motors, the tactics are part of each company's larger strategy to turn their companies around after last year's bankruptcies. For Hyundai and Kia, the outreach to subprime borrowers is a way to gain market share at a time when some of its larger competitors, especially Chrysler, General Motors and Toyota, are have their own struggles.

Whatever the reason, it means increased opportunity for car buyers with bad credit, especially if they do some legwork before they buy. Here are five tips to help ensure you get the best rate on your new car loan.

Check your credit report. Start by requesting your free credit report from each of the three credit bureaus. Review each entry carefully and compare it to your own records. If you find any errors, follow the instructions for having them removed. Fixing any errors could improve your credit score instantaneously, placing you in a position for a better interest rate on your car loan.

Talk to lenders about your situation. Once you're sure your credit report is accurate, contact lenders you are interested in working with for a car loan and talk to them about your credit history. A loan officer can explain how the different tiers of interest rates work at his company and can tell you where you fall within that system. Be sure to reach out to any banks or credit unions where you have accounts, as they may give you a better deal as a current customer.

Give your credit a tuneup. Once you have some insight into where you fall within a lender's tiers, you may be able to give your credit a tuneup that will allow you to move up to a better interest rate. Paying your bills on time, increasing the frequency of your payments such as from once per month to twice monthly, and paying off some lines of credit can help to improve your credit score. Depending on your situation, this could take a while, but doing so could improve the interest rate on your next car loan, making it well worth the wait.

Save for a down payment. While it may be hard to put money into savings while paying down your debt, it's a worthwhile move for you and your next car loan. Lenders will look more favorably on you if you have money for a down payment on your next car, so aim to put aside at least 10 percent of the car's price.

Shop around for the best rate. When you're ready to buy, check online and with local lenders for the best rates. The captive finance arms of many automakers also offer online applications for consumers, getting you pre-approved before you visit the dealer. Remember that when you get a loan at a dealership, the dealer is acting as the middleman and gets paid either a flat fee or marks up your loan by 3 percentage points, so you will almost always pay more by financing through a dealer.

Ask the adviser

If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

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Tara Baukus Mello

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