9 steps to a car loan on damaged credit

9 steps to a car loan on damaged credit
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9 steps to a car loan on damaged credit © Isa Fernandez Fernandez/

9 steps to a car loan on damaged credit

Bad credit doesn't mean you can't buy a car, and doesn't automatically mean you can't get a car loan with terms that don't break your monthly budget. 

Like everything else, "bad" is a matter of opinion and degree. If the score is borderline, some lenders might still smell a good prospect while others, with slightly different criteria, would see more risk.

Get personalized auto loan rates and your free credit report at myBankrate.

Most important: Shop around. While the average interest rate for borrowers with good credit is between 4% and 5%, subprime borrowers will pay an average of 10% to 13%, depending on their credit score. Some lenders can go higher than that, according to Phil Reed, senior consumer advice editor for "You don't want to have the attitude of 'just get me a loan.' There are still deals to be made."

It's also a good time to be looking. Delinquencies on auto loans dropped in the first quarter of 2015 compared with a year ago, so lenders are more confident, leading to a rise in subprime loans.

Here are nine strategies to help you find the best subprime auto loan.

Shopping for a car or just a car loan? Download Bankrate's auto app for price comparisons, loan calculations and more.

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1. Don't assume the worst

1. Don't assume the worst © iStock

Don't take someone else's word that your credit is bad. Check for yourself by grabbing your credit report and credit score. Even two candidates with an identical score might not be the same in the eyes of a lender, says John Van Alst, staff attorney for the National Consumer Law Center. "Even if your score is tarnished, you may have a better chance than someone with the same score and no (credit) history," he says.

2. Shoot high

2. Shoot high © mangostock/

Keep in mind: Because auto loans involve less money over a shorter period of time -- and a car is easier to repossess than a house -- the same credit score that might have put you in a subprime mortgage loan could bring you a prime or near-prime auto loan. If you actually have good credit and apply for a subprime loan, it's likely that you will get less favorable terms than you deserve.

3. Shop around

3. Shop around © mangostock/

Some lenders will see your tarnished history in a more positive light than others. "That's where it becomes more important to shop around," says Reed. But be careful if a lender or lot caters specifically to subprime customers, he says. "Seeing places that are appealing specifically to subprime is a little bit of a warning flag."

4. Start close to home

4. Start close to home © iStock

"Even if you don't think you can get a loan, go to your bank, go to your credit union first," says Van Alst. Apply at the bank where you have a checking account or your credit union. And see if your employer or insurance company offers auto financing.

5. Seek out car-finance lenders

5. Seek out car-finance lenders © View Apart/

Check out sources known for auto loans, rather than lenders known for catering to low-credit clients. This can include name-brand national banks, local and regional banks, and well-known online lenders.

6. Don't go it alone

6. Don't go it alone © wavebreakmedia/

Ask someone to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Not only does it help to have an extra set of eyes and ears, but you can give your partner a role to play -- such as acting unimpressed, dubious or critical of the loan terms.

7. Shop loan terms, not monthly payments

7. Shop loan terms, not monthly payments © LifeStudioPhoto/

Look for the cheapest money -- the lowest APR over the shortest period. Don't be distracted by promises of a lower monthly payment over a longer period of time, says Van Alst. If the only way you can make the payments is to take out a long-term loan, you probably can't afford the car.

8. Look out for add-ons

8. Look out for add-ons © Gajus/

Nonprime buyers are more likely to encounter lending contracts stuffed with nonessential goods and services, says Josh Frank, a risk-modeling manager for the financial software company Intuit and a onetime senior researcher for the Center for Responsible Lending in Durham, North Carolina. Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even insurance, says Frank.

9. Beware of the 'yo-yo'

9. Beware of the 'yo-yo' © karen roach/

If you finance through a dealer, make sure the terms are final, not contingent or conditional, before you sign and drive away. All too often buyers are told days or weeks later that their monthly payments or the required down payment has been increased. Or they're told the financing is not complete and they must accept a higher interest rate. It's sometimes known as a "yo-yo scam." According to the Center for Responsible Lending, victims of yo-yo scams pay an average of 5 percentage points higher in interest than someone who is not a victim.


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