For whatever reason – you’ve got bad credit, but you still need a car. Luckily, you’re not alone in your circumstance and according Experian, over one-third of Americans can count you in the same cohort. Fortunately – there’s lots of methods to getting an auto loan with bad credit.

Unfortunately, it means you’ll likely be preyed upon by unscrupulous lenders, have to wade through vague and unclear terms, and your pathway to getting out of bad credit is littered with issues. Here’s what to expect:

  • APR and lending rates will be exorbitant and complicated to understand initially
  • Many lenders will commit to approving you, only to get you on the lot without an actual approval
  • Often subprime dealers are the worst at packaging additional unnecessary add-ons to your car (warranties, Gap Insurance, etc)
  • Subprime car dealers often egregiously mark up the vehicles in question so you’ll have less chance of selling that car

So … it’s time to buckle up and find a car and loan to get you from “Bad Credit” island to “Good Credit”. A few notes for your journey you’ll need to prepare, and keep in mind a few Golden Rules to escape an auto loan with bad credit.

Golden Rules to getting an Auto Loan with Bad Credit

  • Have a copy of your credit report before taking any actions. Know exactly what collections, adverse actions, or other credit “hits” are impacting your score. You can read more about getting a free report here.
  • NEVER take a loan from an unaccredited lender. It won’t help improve your credit, and you’ll end up paying loans to a dealership that won’t help you establish credit. Its better to take worse terms and improve your credit so you’re next car is substantially cheaper.
  • Purchase the bare minimum car you’ll find passable. This is not time to get that new wrangler, Cadillac Escalade, or Mercedes you’ve dreamt about just because you’re approved. This is the equivalent of credit-war time, and you need to live on rations before celebrating victory.
  • Many captive finance companies are offering loans (to recognize a “captive lender” the loan company will have the same name as the car brand, such as Hyundai Motor Credit). Many times getting an auto loan with bad credit at your franchise dealer is a better idea than traveling to an independent dealer lot.

Given those rules – here’s a selection of bad credit lenders who are accredited, and still provide auto loans with bad credit.

  1. Santander Consumer (RoadLoans)
  2. Ally Financial
  3.  Credit Acceptance Corp
  4.  Americredit
  5. Westlake Financial

Considering a car before the Loan

And given those rates here’s the “barely” passable criteria of cars you want to consider.

  • Stick to sedans with good fuel economy. You’re in savings mode, no point to pay interest, and gas as long as you’re in sacrifice mode.
  • Reliability is key! You don’t want a single penny going to un-budgeted repairs, and so avoiding spending money on maintenance means:
    1. Stick to Japanese or Korean Brands (Toyota, Honda, Hyundai, etc)
    2. Try to avoid excessively high mileage cars
    3. Always get the car inspected by a mechanic to ensure you’ve got a budget of potential work that needs to be done (a set of new tires for example can set you back $300-600 on an economy sedan)
    4. Don’t buy any add-on products from the dealership (warranty, Gap insurance, etc). These products are far cheaper (and can still be financed) outside of the dealer.
  • Minimize monthly expense (This is not the time to spring for anything “comfortable).

How long do I have to be in my “bad credit auto”

The goal is as little as possible. To do so the most important things are:

  • Make 100% of your payments on time
  • The longer the history of your payments the better your credit
  • Refinance after 12-24 months

A good rule of thumb is roughly 12-24 months of car payments with 100% on time payment should make a marked difference. To ensure you’re getting better you should use a credit reporting agency or service to continue tracking your progress.

Why wouldn’t I just get a really crappy car for a while and pay all cash?

Counter-intuitively, if you don’t get an auto loan you’ll be unlikely to get out of your bad-car credit situation.

Think about it this way: If a bank had to choose between two customers who both had bad credit – would you choose the customer who had already successfully paid an auto loan, or one who was simply requesting one?

So to build “auto-related” credit, you’ve got to have an auto loan, and paying cash for the beater will never help you out.

Okay I’ve suffered long enough – what’s the prize at the end?

While I still recommend being financially frugal, you can certainly get something much more accommodating for the same money now (that’s the magic of compound interest!).

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