Minimizing the Impact of Bad Credit on Auto Loans

Richard Barrington
LoanBiz Columnist

It is not realistic to expect people with credit problems to stop borrowing completely, especially when it comes to things like car financing. So what happens when someone with bad credit needs an auto loan? The key to handling this situation is for the borrower to first understand what impact bad credit is likely to have on car financing, and second, take steps to minimize that impact. If pursued correctly, a successful car financing experience can not only help with the immediate need for transportation, but can be a step toward improving the borrower's credit history.

Understand the Credit Report

The first step a borrower with credit problems should take is to thoroughly understand his or her credit report, warts and all. This can help in three ways:

• Any mistakes can be identified and corrected. There may be some legitimate black marks on the borrower's credit, but it doesn't help if these are compounded by reporting errors.
• Understanding the history gives the borrower a chance to explain it. When in doubt, a lender's decision on a loan may come down to how constructively the borrower can explain any credit problems.
• Knowing the timing of past problems will indicate when the credit history is due to clear up. The borrower may find it worthwhile to wait another six months for an auto loan, so the application can be made with a cleaner credit history.
  

The Effects of Bad Credit on Auto Loans

Once the borrower has faced up to any black marks on the credit report, what does this mean? How does bad credit affect auto loans?

Principally, bad credit can have two negative impacts on an auto loan: it can result in the credit application being denied, or it can result in a higher interest rate being charged for the loan. While not getting car financing may seem like the worst possible outcome, being charged a higher interest rate can put the borrower in even tighter financial straits in the future.

Fighting Back

Two ways a borrower can fight back against the impact of bad credit on an auto loan are making a larger down payment, and/or applying for a shorter-term loan. Both not only give lenders greater confidence to approve a loan but will also reduce the effect of paying an interest rate premium.

Larger down payments and shorter-term loans will require the borrower to make some financial sacrifices in the near term, but this can be worth it in the long run. A successful auto loan experience may be the first step to establishing a more positive credit history.

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.