Poor Credit Car Finance Options

Poor credit car finance can be an unfortunate part of life. Poor credit isn't the end of the world, and it certainly doesn't mean you can't find a car loan. However, there are a few things to keep in mind when looking for a car loan with less than perfect credit.

If you have less than perfect credit, you're not going to be able to drive a brand new Aston Martin off the lot, but you will be able to find a reliable car that suits your needs. Most auto dealers and finance companies will have certain types of cars that they will allow to be financed by those with poor credit. These cars are usually smaller, possibly compact cars. They may have high mileage, and may be a few years old. The reason the dealership or finance company may set these aside for poor credit customers is because this isn't as much of a risk. The cars are usually not worth a whole lot, and if you default on your payments they won't be out much money. So be realistic when you are looking for a car with bad credit.

If you have poor credit you can expect a higher than average interest rate for the term of your loan. In early 2009 the average rate for an auto loan was right around 6.5%. If you have less than perfect credit you can expect to pay several points more than that, averaging around 12 to 15%. The finance company assumes that with a higher rate you are more likely to want to pay the vehicle off sooner to avoid paying excess interest. It's also a safeguard for the finance company. They won't lose as much money on a customer who defaults at a higher rate. Since you've been paying a higher rate already, the finance company will have already made their money if a default occurs.

If you have poor credit you will likely not be able to get a six year loan for a car. Instead, the finance company is likely to offer you a two to three year term instead. Since the cars you will be looking at are lower priced cars anyhow, this shouldn't hurt you too much. Again, this is done as a safeguard for the finance lender. You are more likely to be able to make all your payments over a few years rather than a longer period of time.

Expect to have a high down payment required on an auto loan if you have poor credit. Most finance companies will require a minimum down payment of $1000. You may be able to find a dealer or lender that will work with less down, but it's not likely. This works two-fold. First, they will receive a big chunk of the car's payment up front, making you more likely to continue to pay so you won't lose your investment. Secondly, they are assured a high percentage of the car's worth up front so they won't lose as much money if the loan is defaulted and the car needs to be auctioned.

Poor credit is a fact of life for many people. As long as you're careful and realistic, you can still find a reliable car to finance.