How to Finance a Car If You Have Bad Credit

One of the largest financial liabilities an individual will experience in their lifetime is ownership of an automobile. Cars depreciate, break down, accrue interest, etc. This liability is particularly acute if you have bad credit. Interest rates are significantly higher, and in some cases, dealers may even charge more for the car, counting on the fact that you may not be able to get financed any where but at their own dealership.

Following are a few tips that may make the difference between getting financed or not, or getting an fair interest rate, as opposed to getting "raked over the coals" on the loan.

Most importantly, pay down your revolving credit more than a month before you go car shopping. Your "available credit" on your credit report is a big factor in determining your FICO score. If you are maxed out on a $500 Visa Card, make the effort to pay off the card well before you start looking at cars. Chances are, that effort will save you hundreds in interest.

Likewise, you should find any items that appear in the "Collections" section of your credit report, and pay as many as those off as possible. Many times, I would have customers who had small items, such as $20 co-pays from a doctors visit in collections status on their credit. Those are small items, but can adversely affect your credit rating.

If you have a "worthless" trade (ie. An old beater with over 100,000 miles that may not even run) do use it as a trade. Sometimes, people assume that their broken heap is of no use to a dealer. Maybe so. However, when it comes to financing, a dealer can make your trade have the appearance of you putting a lot of equity down for the loan. For example, if you are buying a $7,000 car, and you have a trade that is worth only $100, a dealer can write it up for the banks that you appear to be buying a $9,000 car, and trading in a $2,100 car. In both cases, you are still only paying $6,900 plus your trade, so the amount that you are paying, and your taxable net sale is the same. In the second scenario, however, the bank is led to believe that you are putting down nearly 25% in equity. If you took the trade out of the equation, you have no equity going into the deal at all. That old beat up trade can really help.

If you can get a co-signer, do it! It can be embarrassing asking a friend or a family member to co-sign on a loan for you. However, keep in mind the savings you may experience on the loan may be very substantial. If you can make payments regularly in the loan for 6-12 months, you have a very good chance of being able to re-finance the loan without a co-signer on your own, thus release the co-signer of any obligation.

Lastly, avoid giving your credit information to too many dealers. Some people will shop at 10 or more dealers, and give each dealer the necessary information to pull their credit. In some case, each dealer will send an application to multiple banks, resulting in a huge number of inquiries. A large number of inquiries will pull down your credit rating. Only give permission to pull your credit to the dealer who has the car that you definitely want to buy.

Following these steps won't absolutely guarantee that you will get financed, however, they can greatly increase your chance of getting financed, and at a fair rate if you can heed these simple steps.