Quick Tips on Bad Credit Auto Loans

If you're in the market for bad credit auto loans, you're not alone. There's a booming subprime auto lending business going on.

Does this mean many more consumers who need bad credit loans today? Not entirely. Subprime financing has come into being with the use of the fico credit score. Lenders use credit scores to predict quite accurately what percentage of borrowers will default on loans at each credit scoring level. For example, at below 500 points, more than 80% of borrowers default. At 700 points and up, only a small percentage of borrowers default.

This lets lenders set interest rates for each credit scoring level to cover the expected defaults. The bad news is that the higher interest rates can cost a small fortune. The good news is that many more people can qualify for bad credit auto loans-the same people who used to be turned away entirely.

To find the best deal in bad credit auto loans, check first with your bank or credit union. Some have special deals for existing customers. Then, use one of the easiest methods of shopping: an online aggregator like LendingTree or NexTag. These companies work with several lenders and will give you up to 4 competing bids. You'll be surprised at how much each lender's terms and rates can vary. If the first several lenders can't offer you a loan, keep looking and don't get discouraged; the field is very competitive and you'll probably find a lender if you keep looking.

Rate shopping

As with home loans, you can rate shop for bad credit auto loans (and auto loans in general) without making a dent in your Fico score. If you do all your rate shopping within 2 weeks, you'll only "pay" a couple of credit score points on the first application. All the other applications will show on your credit report, but they won't lower your score any further. So plan your shopping for bad credit auto loans carefully; at lower score levels, every point counts.

Boost your negotiating power with pre-approval

Dealers will often entice buyers into the showroom with low interest offers, or offers to work with those who have bad credit or no credit. That sounds easy but can sometimes put you in a negative negotiating position.

Don't get hoodwinked into thinking that because you have bad credit, you must take the dealer's loan packages or inflated prices. They may talk as though they're doing you a favor, making bad credit auto loans available to get you into a car & then jacking up the sales price. But you can often get better rates on bad credit auto loans when you shop for them yourself, outside of the dealership.

In addition, when you arm yourself with pre-approved, your credit rating (and your vulnerability) are not part of the car price, leaving you free to push for the right deal. The best plan is to know what the car should cost without financing; then balance the selling price with the whole picture of financing costs, rates and monthly payments.

Refinancing bad credit auto loans

After 13 months of good payment history on your auto loan, look into refinancing at better rates. Credit scores will have improved, and will move up again substantially at 24 months and again at 36 months if you make on-time payments consistently. The difference between, for example, a 16% and a 10% rate on a $12,000 loan puts about $100 per month back into your pocket, providing valuable cash flow for your financial recovery.

Your financing company doesn't own you; take advantage of all the ways to get free credit reports these days and you'll know how to make them work for you, not against you.