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How to Get Approved For a Car Loan if You Have Bad Credit

By Liz Opsitnik
Friday, Aug 14 2009 19:00

We talked to Paul Gillespie, senior vice president of dealer services at AmeriCredit, to find out how consumers with bad credit can get a car loan. AmeriCredit is an automobile finance company based in Fort Worth, Texas that deals primarily with subprime borrowers.

Q: What credit scores do you work with for auto loans?
A: We target credit scores between 500 and 680.

Q: What are the top 5 things you look at when reviewing a consumer's car loan application?

1. Payment-to-income ratio. Are they buying a car they can afford? The car payment should be no more than 15% of their gross income, preferably 10%. So if someone brings home $3,000 a month, they should have a $300 to $350 monthly payment.

2. Income level. The minimum level we look at is $2,000 to $2,500 a month. We look at the applicant's other obligations as well.

3. Time in the credit bureau. We look for them to have 5 or more years of credit history. Having 5 to 7 trade lines is good. Previous auto credit is a plus.

4. Are they trading in a unit (car)? If not, are they taking on another payment?

5. Are they putting any cash down? With all the aggressive rebates right now, we don't give as much weight to the down payment. The manufacturer rebates are bringing the car back down to its real value. The more cash down, the more commitment the borrower has to repay the loan.

Q: How does a bankruptcy filing affect getting an auto loan?

A: If they are currently in bankruptcy, then we won't approve them. If they filed bankruptcy and the bankruptcy has been discharged, we will look at this application.

Consumers with bad credit don't necessarily have to buy a car at a buy-here-pay-here lot. Dealers have many lenders that can finance an auto loan for subprime borrowers.

Q: What should car shoppers with bad credit know before they apply for an auto loan?

A: They need to be prepared to disclose all their information. We're more focused on verification of income today. They need to be ready to prove anything they put on the loan application. Underwriters are doing more to verify information. There's no upside to fudging your application. It just takes one or two things that can't be verified to be denied.

They should buy a car that makes sense financially. Know what your maximum payment is that you can afford. Be conservative. Dealers will try to up sell you. Stand firm on your payment number. Realize that if they try to sell you add-on products, this will increase your monthly payment.

Q: What should car shoppers do if they were denied for an auto loan?

A: Who were they denied by? Most dealers will send their application to several sources to find funding. One or two may approve it and one or two may reject it. There are many other lenders out there. Just because they were denied at one dealership doesn't mean another dealer can't help them.

Q: Should car shoppers with bad credit have a down payment ready to put down?

A: This depends on the lender. Some want 10 or 20%, and some will fund 100% of the loan. In general, having a 5 or 10% minimum down payment is a good rule of thumb.

Q: What interest rates should a subprime applicant expect to receive if approved for a car loan?

A: It depends on which state they're in. Some states have usury caps and ceilings, some don't. They may get an interest rate in the mid-teens to mid-20's in some states. The rate can vary by the car's model year too. They should know that they aren't likely to get a single digit interest rate. And they need to calculate this into their monthly payment.

Q: Should someone with bad credit try to find a car loan online at an independent lender before they go to the dealer?

A: Online is not really a robust environment for subprime borrowers. The dealer is looking to sell cars. There are sources out there that can help them. The customer should not assume that they will get denied if they try to get an auto loan through the dealer. Many dealerships have lenders they work with who deal with subprime borrowers.

Confused or unsure about some of the car loan terms used in the article? Click here for our Auto Loan Glossary.




5 comments on this story so far.

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Comment By: Ms. Henderson on Tue, Aug 18 2009 at 5:35 PM
I have an auto and I am behind in the payments. I have been beeging the company to refinance for me and get me a less gas eater and a smaller payment. My hours at work havre been cut again. Yes I was late 2 times in 2 years. Now I am afraid they are coming to repossess it. I've tried to borrow the money from friends , to no avail.. Please give me some advice!!! I don't qualify for the klunkers program because the car is only 4 years old and less then 60k miles on it. They also told me they could not add anything to the end of the loan.
Comment By: on Wed, Aug 19 2009 at 11:23 AM
Ms. Henderson,
The age of your vehicle would qualify for the cash for clunkers program. The mileage has nothing to do with it. It has to get 18 mpg or less though to qualify for the fuel efficiency. But if it is worth more than $4,500, it doesn't make sense for you to use the cash for clunkers program.

If your current auto lender won't refinance the car loan for you, you might want to try your local credit union. Also, if you can give us more specific details on your loan, we can give you better advice. How much do you owe on the vehicle? What is it currently worth? What is your interest rate?
Comment By: Sandra on Wed, Sep 2 2009 at 8:53 PM
I brought a car in 2001 and paid it off beautifully by 2007 except for one late payment that got lost in the mail. My sister had credit issue and needed a car. So I volunteer to help her....biggest mistake. She was doing fine the first year of the loan but just recently this year she was late on her Jan., Feb., Mar., Apr., and May payments, which dramatically lowered my Fico score. As of the month, I got engaged and my fiancée is having car trouble and wanted me to finance he's leased vehicle. My question is will the dealership approve me for a loan and will I ever be able to buy a car now that a have a need for one with 5 moths of late car payments history. Also, how can I start fixing this now so I don't have any problem getting a car loan.

Comment By: on Thu, Sep 3 2009 at 3:41 PM
Are you looking to get approved for a car loan for yourself or for your fiance's lease? Also, what range is your credit score in? We would think that with 5 late payments, this would hurt your credit score decently. Also, this may have lowered your auto loan specific credit score, which only the dealer and lenders can view.

If your FICO score is 620+ and you have sufficient monthly income, you may get approved for an auto loan, but it may be at a higher interest rate. If you want to lease, you'll need at least a 660-720 FICO score, depending on the lender. Some require a minimum of 750.

Those late payments usually stay on your credit report for up to 7 years. In the short term, just pay all your bills on time, use a credit card wisely, and pay down your credit cards to a 10% or lower balance. Fixing your credit score depends on how low or high it is. It usually takes anywhere from 3 months to several years to repair.
Comment By: Sara on Sun, Sep 13 2009 at 7:38 PM
I have 2 cars now due to before this i have to work separate with my husband but now i have 2 babies so i spend lots of times at home and dont need 2 cars.
The 1st one is '05 CLK500 which is still financing (price was 26000 and i put 8000 down payment). i bought her 2 years ago.
2nd is '05 Jetta also financing with price 12000 and i put 3000 down payment. i bought her 1 year ago.
I made payments on time for both of them.
I have 5 credit cards which pay on time too but they are all full balance.
I am looking to trade both car to be only 1 car to save money. Oh i just got an accident 2 weeks ago and am scare that the insurance gonna go up in next year that's why i want to have only 1 car to save insurance payment too.
My question is am i gonna get approve for new car? coz i still owed the bank for 2 cars and what should i do? Thank you so much

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