Bad Credit Auto Loan

Figuring out which new car to buy can be a very stressful experience.  Financing decisions only add to that stress, especially if you have bad credit.  Having a bad credit score can hurt your ability to get a competitive interest rate on a car loan.

Car Loans and Bad Credit

If you listen to car loan advertisements in the marketplace, you wouldn't think credit scores made any difference at all.  You'll find offers of zero percent financing, college graduate rebates, low down payments, and special financing packages available through automobile manufacturers.  But what if you had trouble making some of your other monthly loan payments in the past?

Bad credit can, and will, hurt your ability to get a competitive interest rate on a car loan.  In fact, you might even be denied credit.  Fortunately, you can take steps to improve your credit rating; especially if you think it's lower than justified.

In this publication, we're going to explain exactly what you can do if you think there is a problem with your credit score.  That discussion will include steps you can take to have your credit report corrected.  But first we're going to help you to better understand what a good credit score is for an individual, and what might be considered a bad credit score.

National Average Credit Scores

If you try to get a car loan from a dealership, local bank, or lender, one of the first actions they will take is to check your credit score.  Even though there are several credit reporting agencies that compile and report payment history data, these companies use the same basic approach to calculating a score.  The method is sometimes referred to as a FICO score.

If you know your credit score, then it's possible to make a comparison against a list of average credit scores throughout the United States.  Comparing your score to the average found in your area of the country will help you to understand how you rank in terms of being a credit risk.

If you want to make a more detailed comparison, then you can look at a table of FICO scores.  From those tables, we know that only 15% of the population has a credit score below 600.  With that kind of information, you can get a good feel for how good, or bad, your score is compared to other individuals in the market for a car loan.

Credit Reports and Car Loans

If you believe you have bad credit, then you should take a closer look at your credit report.  In fact, you should do this before applying for an automobile loan.  Your credit report is a history of your payments to others.  It contains records of your payment patterns, which help to paint a better picture of your financial reliability.

You should ask to see a copy of your credit report.  This allows you the opportunity to correct any errors that might exist in the document.  You'll want to make sure that all errors are corrected before you apply for an auto loan.  This will give you the best possible chance of getting the most favorable loan terms.

If you have some bad line items on your credit report, enough to make it seem like you are a legitimate credit risk then you'll want to start taking action to help clean up a potentially bad credit rating.

Erasing Bad Credit

There are many marketing claims stating that bad credit can be erased.  No matter what the advertisement says, this is simply not true.  Many companies try to appeal to consumers with a poor credit history.  They usually want to charge a fee to help clean up your credit report.  This cleanup process promises to be a way to get a car loan.  While you should always explore all of your options, providing false information when applying for credit is against the law.

Credit Repair the Right Way

Under the Credit Repair Organizations Act, companies offering credit repair services cannot require payment for services until they have actually completed the advertised service.  Under the Fair Credit Reporting Act, you are allowed to question any record in your credit history file, and your complaint must be investigated.

Negative information will be removed only if the investigation determines that a mistake has been made by the credit agency.  Accurate information cannot be removed from your credit history; only time can heal those problems.

Free Credit Reports

You're entitled to one free credit report annually, from each of the three credit agencies.  You can obtain a free copy of your credit report each year if you can prove you're unemployed and plan to look for a job within 60 days, you're collecting welfare, or your report is inaccurate because of fraud.  You can also get a free copy of your credit report if you've been denied credit within the last 60 days.

Getting a Car Loan

Just because you might have bad credit, doesn't mean you won't be able to get an automobile loan.  Lenders have their own credit standards, and not all of them will look at your credit history the same way.  Some lenders will focus on more recent trends to evaluate your risk level for a loan.  These companies may grant you a loan if your bill payment history has improved.  It may be worthwhile to contact lenders informally to discuss their credit standards.

If you need additional help, then you can always contact a credit counseling service. Counselors will arrange payment plans that are realistic to you, and acceptable to your creditors.  You should also take a look at our article: Credit Card Debt Elimination.  That publication discusses alternatives such as debt consolidation and budgeting.  All of these tactics can help you make monthly debt payments on time, and that is the best way to improve your score.

Fixing a Credit Report

If you obtain a copy of your credit report, and you find an error, it's a good idea to get that error corrected before applying for a car loan.  Under the Fair Credit and Reporting Act, all credit agencies are responsible for correcting inaccurate credit reports.  To learn how to correct a credit report, as well as obtain the contact information for all three major credit rating agencies, take a look at our article on the Fair Credit Reporting Act.

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