Pre-approved Loans

Finally, all borrowers should try to get pre-approved for a loan before they visit a dealership. For buyers with bad credit, this can be difficult, since most mainstream lenders, especially banks, typically don't offer subprime loans. However, if the borrower already has a relationship with a bank or, even better, a local credit union, there is a chance that, even with poor credit (although not deep subprime), the lender might be willing to work with them.

Banks and credit unions, though they are fundamentally different, do share one thing in common: both are direct lenders. This means consumers can walk into a bank or credit union and get a pre-approval for a car loan without having to visit a dealer.

Once approved, consumers can then shop around for a vehicle like a cash buyer. In other words, the money they borrow isn’t tied to a specific vehicle. The bank or credit union gives each buyer a maximum amount to finance and that, plus other factors (specifically, loan to value – the bank will state the percentage of the vehicle’s MSRP they’ll finance) will determine the price range of the loan.

So how does this work for car buyers with credit issues?

Although we recommend this approach to all car shoppers, those will poor credit won’t always be successful because most direct lenders have more stringent credit guidelines than the indirect lenders that specialize in problem credit applicants.

Having said that, here are some tips for people with lower credit scores:

• For your best chances, pick a bank or credit union where you have an established relationship with a deposit and loan history
• Credit unions are traditionally more lenient than banks, although their additional services (after hours and online banking) are sometimes limited
• Banks are typically less tolerant of credit missteps than credit unions, but usually offer a wider array of services