How to Secure an Auto Loan When You Have Bad Credit

If you are in the market to purchase a car, the first question you should ask is, "What is my credit score?" If you don't know the answer, you better find out. Your credit score, whether good or bad, will significantly impact your ability to secure a new car loan and what interest you will end up paying on that loan if approved. Depending on how low your credit score is, you could end up paying as much as 23 percent interest on the loan.

If you are among those consumers with a less-than-stellar credit history, the following tips could help you navigate the road to purchasing a car, a road that can be especially treacherous for those with low credit scores.

If possible, do what you can to improve your credit score first.

This might seem tough - you want that new car now - but if you can manage it, getting you credit score to 680, or at least above 600, will help in securing the best possible auto loan as well as avoid any dishonest dealerships looking to take advantage of those with poor credit. Some steps you can take to improve your credit score include paying down any credit card balances until they are below 50 percent of the credit limits. Ideally, your debt-to-income ratio should be below 30 percent.

Save up enough to put at least 20 percent down.

Many people, regardless of credit history, neglect to follow this rule. However, putting at least 20 percent down toward the sales price is a smart idea for anyone in the market for a new car. The reason behind this rule is cars depreciate in value by about 20 percent in just the first year alone. If you put less than 20 percent down, you will find yourself upside down in your auto loan during at least the first year.

Secure the auto loan first; pick out the car second.

You might be in love with that shiny red convertible, but unfortunately your affection for the car does not mean you can afford it. A good rule, especially for those with poor credit, is to apply and get approval for an auto loan amount before finding the car of your dreams. The purpose of this rule is twofold. First, if you have a low credit score, dealerships might be leery to take on your high-risk loan. You might not be able to find any Toyota dealerships willing to lend you money, but a Honda dealership might be willing to work with you, making your dream car turn from a Camry into an Accord.

Second, if you can, securing your auto loan from a source other than the dealership often will result in getting a better loan, with lower interest rates and no application fees. If your credit score is at least 680, your best bet is to apply for an auto loan online - online lenders typically offer better rates on loans than any dealership.

Make sure you are completely prepared by doing your homework.

The worst thing you can do is enter an automotive dealership not knowing your credit score and what APR you should be paying on any loan. You should have already taken this step but if not, make sure to get your credit score from all three credit bureaus before shopping for a new car. You will need to request your credit report with the credit score option, which comes at a minimal cost. Additionally, if you have applied for a loan online, you will know what type of APR you can get for your loan.

Unfortunately, there are unscrupulous auto dealerships out there that will outright lie to you - they might tell you that your credit score is lower than it actually is or that they can only get you approval for an extremely high interest rate. If you come in fully prepared, such dishonest salespeople will be unable to take advantage of your credit challenges.