Trying to get a car loan when you have bad credit may seem overwhelming at first, but there are ways to improve your chances if you are willing to accept a higher interest rate. However, having bad credit does not mean you have to get stuck with bad loan terms. By taking the following steps, you can ensure an outcome that will not break your monthly budget.

1. Become Intimate With Your Credit Report

Some people assume their credit is bad based on a low credit score. While your credit score is a key measure of your creditworthiness, it does not tell the whole story. Several factors go into calculating your credit score, such as payment history, credit utilization, length of credit history, type and mix of credit, and new credit accounts. Your credit report highlights the areas adversely affecting your score. If the report indicates missed payments, make notes regarding why they were missed. Look for errors, such as a collection account that should no longer appear on the report, and report them to the credit bureaus.

Know why your credit score is low so you can take steps to increase it, such as lowering your credit utilization by paying off credit cards. Be ready to explain to a lender why you missed a payment or have a collection account. Many lenders are willing to consider life situations that caused a temporary hardship, such as a job loss or high medical expenses. Auto lenders in particular may give equal weight to other factors, such as your current income, the length of time at your current job and your work history.

2. Know How Much Car You Can Afford

Aside from your credit score and history, lenders base their decision on your ability to pay. They consider your current income and monthly expenses in determining how much to lend you. If you are considering a $22,000 car and are approved for a subprime annual percentage rate (APR) of 14%, your monthly payment would be in excess of $350 per month for five years. Make sure your monthly budget can allow for it, and do not deviate from your budget plan. You may be better off buying a new car because it tends to have the best financing terms.

3. Go Big on Your Down Payment

The biggest mistake people make when buying a car is to try to finance it with the smallest down payment possible. If you do not have the money for a sizable down payment, then you are probably not financially prepared to buy a car. Also, your car may depreciate as soon as you drive it off the lot. It can be far less expensive to save for a few extra months to accumulate a bigger down payment than to finance the difference over the period of five years. Try to put down a minimum of 20% when financing a car.

4. Shop Lenders

Loan rates can vary widely for prospective borrowers with bad credit, so it pays to shop around. Start out with your own bank or credit union to see what it is willing to offer. If you are turned down, start exploring reputable lenders that specialize in auto lending. As a last resort, you can look at auto lenders specializing in subprime loans. Do not take the first offer you get. Shop around to see what is available. You can also go onto dealer websites and fill out a credit application to get pre-approved for an auto-loan. Do not be afraid to fill out multiple credit applications. Although multiple credit inquiries can hurt your credit score, auto lenders know you are applying to multiple lenders. As long as the credit inquiries are made within a two-week period, they should not harm your score.

5. Check Into Dealer Financing

You may find a dealer willing and able to finance your car purchase. Because these loans are often financed through a third party, they can be more expensive. Thoroughly scrutinize the loan document to see if it includes additional charges for add-ons you do not need, such as an extended warranty or after-market services. If these are required as part of the loan approval, just walk away. Also be aware of financing terms that are contingent or conditional, as these could allow the dealer to change the terms of financing after you drive the car off the lot. Make sure all terms are final before signing the document.

6. Refinance for a Better Rate

If you can only qualify for a subprime rate, it does not necessarily mean you are stuck with it. Most people are unaware that auto loans can be refinanced after 12 months. After you have a chance to build up your credit score, go back to your lender to explore your options.

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