In an ideal world, nobody would have to worry about financing a vehicle with bad credit.   Car finance would be a simple matter:  Everyone would pay cash. With cash, there's no interest, no looming threat of repossession, and you own the car when you drive it off the lot. But it's not an ideal world. The number of people with a bad credit history grows as the stability of the economy plummets and unemployment, foreclosure and other hardships affect more and more of the population worldwide. These days, most people pay for cars with some form of financing - in other words, they apply for a car loan.  What separates one vehicle loan from another is the interest rate offered.  Here are some practical tips for how to get the best vehicle finance rates if you have bad credit and are considering buying a new or used car.

Last Updated:  November 24, 2009

1. Understand that with bad credit, you're in an especially vulnerable position, and it's critical you protect your interests so you don't get caught by auto loan scams.
2. Pay cash for the car rather than finance it, to the extent possible. Any payments you'll be making for a car loan you'll be paying interest on.
3. Avoid making a last-minute car purchase. Check your credit report long before you apply for that loan. Make sure there are no errors on either your Experian, TransUnion or Equifax credit reports, which, according to the FDIC, can hurt your chances of getting a decent interest rate. If you find any, get the credit report errors fixed.
4. Investigate the lenders to see if they're legitimate before you apply for the loan.
5. Investigate several lenders when applying for a car loan to compare them. Inquire as to how long the loan is for, what the interest rates are, and whether there are any early payment penalties.
6. Apply to lenders before you ever set foot in a car dealership or place an Internet bid for a vehicle. Apply to only one lender at a time and wait for their decision before you apply to others. Be aware that having several lenders request your credit report in a short period of time can further damage your credit rating.
7. If you get a car loan pre-approved by a lending institution before you know what car you want, you'll likely be more inclined to stick within your car-buying budget. And you won't be surprised by your horrible credit "biting you in the face" when you go to buy a car and are turned down, thus leaving you vulnerable to fraudsters.
8. Don't let the dealer know you're pre-approved for a car loan at a bank or credit union until you've agreed on the best price.
9. While using a home equity loan to pay for your car may come with favorable terms, the risk is that you can lose your home if you can't make the payments.
10. When figuring out the amount to borrow, don't forget to add in the costs of car insurance, taxes, and extra options such as an extended warranty.
11. Go for a shorter car loan whenever possible. A car loan you'll be paying for more than about five years may not be realistic. If it will take you longer to pay the loan, it may be more car than you can afford. And by five years, you may want to trade the car in, but your car's trade-in value could be less than money still owed on it. Yet to keep the car, you may have to shell out money for maintenance and not have it available because you are still making car payments.
12. However, if you won't be able to make monthly payments for your car without going further into debt--i.e., your monthly auto payment obligation exceeds the available amount of cash left over from your income after living expenses--then go for the lower monthly payment and the longer loan term.
13. If you can't make the monthly payments on your car in time, you risk your car getting repossessed. In the case that your vehicle is repossessed, the creditor may sell the car. And if the creditor gets less than the value of the car, you may still be responsible for paying the difference left on the loan balance. In some states, the creditor must take you to court to repossess your auto; in others, they don't need to. Protect yourself from the outset by making timely payments on your car loan.
14. Read the terms of the loan on the loan contract very carefully. This is a legally binding agreement; don't let anyone push you into signing before you're ready. Don't rely on trust because he or she seems a good person. Don't get so friendly with the lender that you're afraid of speaking up about your doubts or pursuing them for fear of sounding distrustful. Car loan scam artists prey on people's disinclination to seem so "rude" as to question the legitimacy of an auto loan lender.
15. Don't let bad credit become worse debt by missing payments or defaulting on loans. Call your creditors to make payment arrangements. Get credit counseling from a legitimate service for help managing your bills--try nonprofit credit counseling organizations through your state, or explore credit counseling options at credit unions or local universities.
16. Be wary of the "catch" in great financing deals offered by the car dealership. Low financing rates for auto loans may only be offered for high priced cars with a huge cash downpayment.
17. Never drive a car off the lot without all the blanks having been filled in on the car buying and financing contract.
18. If you plan to trade in your car, research its value before setting foot in the car dealership, and don't mention that you want to trade your car in until you've already negotiated for a good price. Be aware that selling your old car may actually gain you more cash than using it as a trade-in.
19. The auto loan lender may allow you sign a finance contract with a co-signer, usually somebody you know who's willing to become equally obligated to fulfill the contract in the event you default on the loan. Getting a co-signer on the loan may make your "horrible credit" history a worthwhile risk to the lender.
20. Know the value of the car you're considering buying ahead of time.
21. Research and decide ahead of time if you'll want credit insurance or guaranteed auto protection. Contact your Attorney General's office to find out any regulations about these types of insurance in your state. Don't be lured into buying them if you don't want them.
22. Understand what agreement you're getting into with the lender. Until the auto loan is fully paid off, the credit union, bank or finance company may hold either a lien on the title of the car or may hold the vehicle's title itself.
23. If you plan to apply for financing at the car dealership, you'll need your basic personal information including your social security number, address history, income amount, current sources of income, employment history, and credit account information. A reputable car dealership will be sure to order a copy of your credit report.
24. Applying for financing at the auto dealership means that the dealership's finance department will submit your application for a loan to a lending institution for approval to see if they will buy your vehicle purchase contract.
25. If you're worried you may have been scammed by a finance company or car dealer, contact the Federal Trade Commission (1-877-382-4357)