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How to Get the Best Auto Loan Rates and Terms with Subprime Credit By John Campbell

If you need an auto loan but find out your credit score isn't exactly very good don't throw in the towel just yet. There are still loans available to borrowers with subprime credit.

What is considered subprime credit, you may ask. Subprime credit is essentially bad credit. If you've missed payments on credit cards or utilities, have too many debts or filed for bankruptcy in the last 7 years, your credit score could take a beating. Generally, most lenders consider subprime credit scores to be 679 or below. The farther down your score is, the harder it will be to get loans with acceptable rates and terms. If your credit score is below 575

Your best bet to get a subprime loan is to shop around for a direct lender who will provide you with an affordable auto loan. The interest rate you pay on a subprime auto loan may approach 20 percent; three times what you might pay for a loan with good credit. The high interest rate on a subprime loan may price you out of the market for a brand new vehicle. A cheaper used vehicle may be your only alternative.

Direct lenders will often place restrictions on the used vehicles you may purchase with a subprime loan. Many lenders will only allow you to purchase a used vehicle that's less than 5 years old with fewer than 60,000 miles driven. An older vehicle with more mileage could need expensive repairs or other costly maintenance more often; draining your funds and increasing your risk of defaulting on your loan.

The most important thing to consider when shopping for a subprime loan is if you will be able to afford it. With its higher interest fees, a subprime loan on a used vehicle can cost over $100 more than a comparable prime rate loan for a new vehicle. If you can't make the payments on your subprime loan you'll lose your vehicle and end up with an even lower credit score.

On the plus side, if you can afford the payments on a subprime loan from a direct lender your payments will be reflected on your credit report and your credit score will likely go up.

If you get approved for a subprime auto loan, the lender may place restrictions on where you may purchase your next vehicle. You may be required to purchase the vehicle from a reputable dealership. This restriction helps protect you from buying a "lemon" without a warranty from a private owner. The more money you have to spend on repairs, the less likely you'll be able to pay off your loan.

If you can't get approved for a loan from a direct lender some auto dealerships will be willing to get you approved for a subprime loan. This can have a number of costly disadvantages, however.

The biggest disadvantage to getting a subprime loan directly from a dealership is that you're at their mercy. If the car you want is sitting on the dealership's lot, you'll have to accept any loan terms or conditions the dealership presents to you or you won't get the car.

Some dealerships will inflate the price of vehicles you are interested in purchasing with their subprime financing.. You may also be required to make a large down payment before being approved for financing from the dealership. Even dealerships that offer low introductory financing rates may drastically increase these rates after you've started making payments.

You should also watch out for dealerships offering long-term loans. If you can't pay off your car before the warranty expires, you could end up paying for costly repairs while still making loan payments. The depreciation of the vehicle at the end of a long-term loan could leave you with a vehicle with little or no trade-in value.

Avoid obtaining financing from dealerships that won't report your timely loan payments to any of the three national credit bureaus. If you can't use your loan to build credit you may not be able to refinance the loan or obtain loans with better rates in later years.

If you have a subprime credit rating, obtaining an auto loan is not something to be done without careful research of all your available financing options. When in doubt, ask lots of questions and make sure you have all loan terms and conditions spelled out in writing before agreeing to any loan.

Be informed so you can make the financial decisions that are right for you. You'll get better rates and may improve your credit score while doing it.

John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.

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