Tips for Securing an Auto Loan If You Have Bad Credit

These days, auto dealers seem to be doing anything they can to sell vehicles. From employee pricing to APR specials, consumers can find a plethora of deals when purchasing a vehicle.

However, for those with less than stellar credit, purchasing a car or truck might seem like an unattainable goal.

One's credit score, good or bad, plays a significant role in the ability to secure a new auto loan and what interest rate will be tied to that loan if approved. A person with good credit could end up with an interest rate in the single digits, while a consumer with a bad credit score could wind up paying as much as 23 percent interest on the loan.

Fortunately, those with bad credit are not out of luck. There are steps they can take to help make car ownership a reality.

Step 1: Improve your credit score.

Many with a poor credit history might believe there is nothing they can do to improve their numbers. However, just by increasing your score to at least 680 can make a significant difference in your ability to secure a good auto loan and avoid dishonest dealerships that target those with poor credit.

The first step you should take to improve your credit score is to obtain a copy of your credit report to see if there is any inaccurate or outdated information listed that should be removed. This step will take some time, but the change in your score could be well worth the wait.

In addition, paying down your credit cards with the highest balances can assist in boosting your credit score. Ideally, you should pay down balances until they are below 50 percent of the credit limits. Eventually, your debt-to-income ratio should be below 30 percent.

Step 2: Save up enough to make a 20 percent down payment.

Most vehicles depreciate in value by about 20 percent during their first year of ownership, which is why financial experts recommend putting at least 20 percent down toward the purchase of a new car or truck. Following this rule can help prevent you from finding yourself upside down on your auto loan.

Additionally, many lending institutions can provide better loan offers to those who are able to make a larger down payment or who can reduce the length of their loan, which can be made possible by putting 20 percent or more down.

Step 3: Secure funding before shopping for the car or truck.

It is recommended that all consumers, and especially those with poor credit, secure financing before finding the car or truck of their dreams. By obtaining financing first, you then can look at vehicles that fall within your predetermined price range.

In addition, some dealerships might be hesitant to finance your vehicle purchase if you have a low credit score, but other dealerships might be more open to working with a high-risk loan. For example, a Toyota dealership might decline to lend you money, but a Honda dealership might be willing to work with you.

Another benefit of securing financing before shopping for a car or truck is having financing in hand when entering a dealership gives you significant leverage when negotiating with the salesperson. Having an auto loan already approved makes you an empowered buyer and as a result, the salesperson is likely to do whatever he or she can to make the sale.

If you have a credit score of at least 680, you will be able to secure the best auto loan rates by applying online. You often can collect multiple auto loan quotes that you then can compare.