bmwIn our modern society, being “without wheels” is more than just an inconvenience… it can be a major problem.

Without a car, shopping is difficult and getting to work may be impossible. That’s why “Food, Shelter, and Transportation” are often named as the three necessities of modern life.

Millions of Americans have discovered that buying a car while struggling with debt and credit issues can be a major challenge… but it’s not hopeless. There are 4 common sources for car loans if you have credit problems, but first let’s look at your situation from the lender’s perspective:

What Lenders Consider

Most lenders consider two major factors when considering a car loan:

  • The “strength” of the borrower, and
  • The “loan exposure”

Your strength as a borrower is determined by two things:

First, your ability to pay back a loan is critical. Simply put, the lender will determine your monthly income after taxes and withholdings. The lender will subtract all your monthly expenses. If there is enough money left over to cover a car payment, then GREAT! If not, good credit or bad, you will find it difficult to get a loan.

Second, your willingness to pay back the loan is also important. Lenders determine this by looking at your credit history and credit score. If this information shows that you have had difficulty paying others, then the lender will be more cautious about making the loan.

So the first step in your search for a car loan, is to improve your strength as a borrower.

Do this by clearing up mistakes and old problems on your credit history, paying off any little monthly payments to improve your payback ability, and gathering all the information the lender might need when you apply for your loan.

The second major factor considered by lenders is the “loan exposure”. Loan exposure is the amount of money the lender might lose if the loan goes bad. Loan exposure is simple to calculate:

Sale price of the car
+ Other financed expenses (tags, inspections, etc.)
– Down payment cash
– Trade-in value
= Loan Amount

The closer the loan amount is to the sale price of the car, the greater the loan exposure, and the less likely you are to get the loan.

So your second step in your search for a car loan, is to minimize the loan amount compared to the value of the car. You do this by increasing the value of your trade-in and by increasing the amount of your down payment.

Where to Get a Loan

When you have done everything you can to increase your strength as a borrower and to reduce the lender’s loan exposure, there are four major sources of car loans when you have credit issues:

Finance companies – These lenders will often make loans to borrowers with credit problems but you must be prepared for an extensive application and screening process. A little preparation here can pay real dividends.

Car dealers – Most car dealers today offer some form of on-lot financing. This financing comes in two flavors:

  • Outside financing – the car dealer is just doing the paperwork for an outside lender (and getting a fee or commission). The outside lender will determine whether or not you qualify for the car loan.
  • Self-financing – Some smaller lots actually finance purchases themselves and many of these lots are very flexible… look at their ads for hints that they serve the large, credit-problem market.

Individuals/Private sources – Some individuals will finance the sale of their cars but a more likely source is repair shops, towing and storage companies, friends, and relatives. Just be prepared … these private sources will almost always want a much shorter term (often less than a year) than commercial lending sources.

Trade-up Strategy – This is not really a lending source but it is an effective strategy for obtaining a car loan with poor credit… particularly when your down payment is not quite large enough for your target loan. Here’s how it works:
Scrape together every penny you can find… just as you would for a down payment. Even a small amount like $600 to $800 will work.
Now, look in the classified ads or on the Internet at sites like You are looking for individuals (don’t even consider dealers) who are selling VERY cheap cars. Look for vehicles that look pretty good with no major mechanical problems… even if they are filthy. Approach owners that are asking $200-$300 more than you have and make your $600-$800 offer. Many will refuse… but you only need one to say YES.

Buy the cheap vehicle, clean it up, and take it to the dealer who has the vehicle you want. You will likely discover that your $600 cash investment is now a $1,200-1,500trade-in (down payment). And you will likely get your loan.
In summary, car loans are available even if your credit is poor… it’s simply a matter of preparation and persistence.

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