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Preparing to Apply for a Car Loan With Bad Credit

Car loans can be had with a less than ideal credit history. The key to getting one lies in being flexible, understanding you might have to accept a higher interest rate, and possibly meeting a tougher set of requirements.

Still, it’s good to know loans are available if you really need a car — even with all of those caveats. What’s more, if you follow these tips for preparing to apply for a car loan with bad credit, the process will be much easier to manage.

1. Review Your Credit History

Federal law mandates the provision of copies of your credit reports from each of the three primary reporting agencies on an annual basis. Request yours at and go over it carefully.

If you note errors, transactions you don’t recognize, or any other suspicious activity, get in touch with the agencies as well as the entities responsible for the reported action(s) and request correction. Bad information has bogged down many a credit score. Meanwhile, even a one or two point improvement can move you into a more desirable category.

2. Review Your Budget

Too many people fall in love with a specific car while shopping, only to learn the object of their affection is out of their price range. If you’ve yet to start living with a spending plan, now is a good time to begin. Doing so will help you meet your monthly obligations more readily, which in turn can help improve your credit score.

Make a list of all of your bills, including the basics like rent, utilities, food, entertainment and etc. Once everything you pay is accounted for, compare the total to your current income. Whatever’s left is likely to be what you can afford to pay for your car each month. Keep in mind; you’ll also need to cover insurance, fuel, registration and maintenance.

This will help you figure out which cars will best suit your situation, based upon the price category within which you’ll be shopping.

3. Research Lenders

While there are a number of lenders out there willing to work with you, their processes and requirements vary. With that said, in nearly every case if your credit score is in the mid to low 600 range (roughly 669 or lower), you’ll be considered a sub-prime or a near sub-prime borrower.

Now, with that said, subprime car loans shouldn’t be looked upon as a scarlet letter of shame. Rather, they should be considered a second opportunity to demonstrate financial responsibility and raise your credit score.

The main things you want to look for in a lender are the shortest loan terms you can afford with reasonable down payments and the most equitable interest rates you can find.

4. Gather Your Documentation and a Down Payment.

You will need to provide the following information with your application.

• Social Security number, current address, and (if you haven’t lived in your present residence at least two years) previous addresses

• Proof of employment; covering existing and previous workplaces, along with addresses and contact information

• Pay stubs or W2s (self-employed individuals may use the previous year’s tax return) to verify income

• Proof of car insurance

• Pink slip for your trade-in (if you have one)

You’ll also need a down payment. In most cases, you’ll get a better interest rate if you can offer at least 20 percent of the price of the car. The more you do to reduce the amount of risk a lender has to take, the more favorably they’ll look upon your application.

Taking these steps before you apply for a car loan with bad credit (or even good credit) will make the process go much more smoothly. Plus, you’ll know you’re looking at cars you can afford.

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