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5 steps to trim a subprime car loan rate

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Highlights
  • A subprime car loan is for a buyer with a low credit score.
  • A consumer has the right to dispute any information on a credit report.
  • A down payment of 20 percent will improve your profile with a lender.

Despite the stigma of the word "subprime" when it's attached to any kind of loan, subprime car loans are on the upswing as a share of overall auto financing, says Melinda Zabritski, director of automotive credit at the credit reporting bureau Experian.

A subprime car loan is for a buyer with a low credit score and a spotty credit history. As a percentage of total automotive financing, such loans represented almost 20 percent of all new-vehicle financing in 2010 from almost 17 percent in 2009, according to Experian. For Experian, a credit score of 670 or lower is considered subprime.

Steven Bowman, chief credit and risk officer at GM Financial, the financing arm for General Motors, says there isn't much a consumer can do to significantly raise a credit score while negotiating with a dealer's financing manager.

"It's (done) over time and not a quick process," he says.

Still, there are steps you can take in the short term to increase your chances of snagging financing and perhaps lowering the cost of a subprime car loan, even as you confront a lousy credit history.

Obtain your credit score

A key factor in determining creditworthiness and establishing a rate, your credit score is a snapshot of your credit status. Good or bad, it is information you should have before you go car shopping because even for consumers with good credit, their credit score can influence their rate.

You can obtain your credit score through any number of online sites. Some sources offer your score for free as a come-on for other consumer-finance services and others charge a small fee, usually $10 or less. The three national credit reporting bureaus -- Experian, TransUnion and Equifax -- provide credit scores and are a good place to begin your search.

Aquire your credit report

A credit score and credit report are two different pieces of evidence a creditor will scrutinize when considering a financing application. If your credit score is a snapshot of your creditworthiness, your credit report is its history.

Credit bureaus report the information creditors provide, which isn't always correct. A consumer has the right to dispute any piece of information appearing on a credit report and should challenge anything that is incorrect. This is particularly true for someone seeking a subprime car loan and who needs to reduce the negative information on his or her credit report.

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Moreover, each credit bureau issues its own report and these may differ from one another. Rod Griffin, Experian's director of public education, suggests obtaining your report in advance of applying for financing to give yourself time to dispute any inaccuracies.

Once you know your credit situation, you can begin to look for ways to improve it. "You need to know exactly what your credit report says," he says.

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