Whenever it comes to car shopping, we almost always recommend that shoppers purchase a used car versus a brand-new one. For a couple of years, it was hard to make that recommendation due to the overblown price in the automotive aftermarket. Now that used car prices aren't getting hit by the pain of the supply chain's ripple effect, prices are coming down. Couple that with the near $50k average new car price, and it points you in the direction of getting a good used car for your next vehicle. What's more, an affordable used car can make the auto loan approval process easier, lower down payments, and help you improve your credit.

But you can't just go out and get any car if your credit rating is in the toilet. It doesn't take many mistakes to get there, either. When your credit falls in the subprime range, it can be overwhelming. But you have to face reality and deal with things head-on, or matters just get worse. A poor credit score comes from large debt, bankruptcy, repossession, or insufficient credit history, and can make financing a used car difficult. Luckily, you can improve your shot at auto loan approval by understanding your credit and what lenders look for.

#1 Review Your Credit Report

First and foremost, you'll need to review a copy of your credit report and look it over to make sure it's correct. Your credit report is the single most important reference point for lenders when it comes to you qualifying for a loan. You'd be surprised that there could very well be errors, but it happens. You can get a free credit report every year from all three credit bureaus including Equifax, Experian, and TransUnion. You can also sign up for free reports on CreditKarma. If you find an error, dispute it on the website with proper documentation and records. The documents should show that payments were made on time in the full amount.

You can't fix your credit score overnight. You might see a small change after 30 days but don't expect your credit score to move from “poor” to “excellent” in less than a year. It also depends on the credit issue. If you had to foreclose on a loan or your last car was repossessed due to nonpayment, the impact will be much bigger than a late credit card payment. The most effective ways to boost your credit score are to be intentional about paying down your debt and reduce your credit card utilization (meaning, reduce your spending) to no more than 30 percent of your credit limit. (e.g., If your credit limit is $15,000, then don't rack up more than $5,000 in credit card debt). Also, consider closing newer credit card accounts and making regular payments on older ones. This will reflect consistency of payments for a longer period of time. All of this will help boost your score. Here are the steps you need to follow.

  1. Review your credit score.
  2. Dispute any errors by formally reporting them.
  3. Pay down your debt.
  4. Reduce your spending/credit utilization.
  5. Eliminate newer credit card accounts.
  6. Make regular payments.
  7. Review your credit score every 30 days.

#2 Understand Your Financing Options

When it comes to financing a car, there's more than one way to get it done. Many new car shoppers usually finance their vehicles at the dealership's F&I (Finance & Insurance) office. According to Experian, the majority (61 percent) of new car financing is conducted through a dealership or directly with an auto manufacturer. Most financing for used cars, however, is done through banks, credit unions, and other financing institutions. Keep in mind that there are other options, and not all lenders are created equal. If you go with a large bank or try to get a dealer loan, they make it harder to approve car shoppers with seriously compromised credit.

Credit unions are a great option. Credit unions are non-profit institutions that are typically owned by the members, and they may present a better choice for used car buyers who also happen to have less than excellent credit.. As a general rule, they provide greater flexibility for borrowers with bad credit to secure a loan. Credit unions oftentimes have lower interest rates on auto loans than banks, so getting a lower APR rate than a big bank isn't unheard of. If your credit history has been compromised by inconsistent payment history, late payments, or even foreclosures, a credit union is less likely to write you off as high risk and may even take the time to understand your specific situation.

Then there are online auto lenders that provide services for car shoppers with compromised credit. Whereas most lenders have physical offices where you can meet with a loan officer face-to-face, online lenders are strictly via the web. Sites like LendingTree, RoadLloans, and DriveTime are just some of the major examples. They all offer quick turnaround on approvals, and you may get an interest rate that your bank can't match. It's no guarantee, but online lenders provide you with greater options. On the plus side, you can do everything electronically and can cross-shop with multiple lenders without stepping foot outside your home.

  1. Check rates with your own banking institution.
  2. Research credit unions in your area and pay them a visit to see what their rates are and how to apply for a membership.
  3. Apply for a loan using an online lender.
  4. See what rates are available at the car dealership's Finance & Insurance department where you might want to purchase your next vehicle.

#3 Do Your Research

When it comes to picking a used car, you have to be patient. You have to be willing to spend hours doing research online and in person. It's not as easy as buying a new car where all of the miles are low and the vehicles are in pristine condition. There's not nearly as much standardization because used cars hold up differently over time, and owners don't maintain them at the same levels across the board. Just because you have an eye on a specific model, color, and trim that also fits in your budget doesn't mean it will be easy to find

Do not buy the first good used car you find. It might be the one you end up with, but it's important to look at more than a handful. Check online ads from dealers and private individuals. Places like CarMax tend to have high markups, and dealers do, as well. Look for market values based on trim level, features, condition, and mileage. If prices out there seem way higher, look at other models where the delta isn't as significant. Also, take the time to look at the number and type of recalls issued for the make and model you're looking at. You can visit the National Highway Transportation Safety Administration (NHTSA) to see what recalls have been issued.

Don't buy a car without a clean title because you have no real idea of what happened to it. Ask the seller to provide you with a CarFax report or pay for one yourself so you know as much as you can about the car's history. Ask for maintenance paperwork, as well. This way, you can know what happened to the car. Look online and cross-shop. Go see and drive every car you're serious about. Also, ask the seller if you can have the car inspected by a mechanic so you can find out the condition of the car that you can't see from just looking at it. If everything checks out, have the money ready. Cash in hand also provides you with some leverage. Also, draw up a contract between buyer and seller that protects both parties. It should provide seller and buyer contact information, purchase price, and terms and conditions.
Use a template like this one.

  1. Research the make and model you're looking for to find out the current price range.
  2. Evaluate if the model fits your budget.
  3. Check the NHTSA for recalls on that model.
  4. Shop online at various reputable sites for used car shopping. Look for well-reviewed websites but also consider.
  5. Never buy a used car sight unseen. Contact the seller to test drive the car and take a look at it. Ask for any relevant repair paperwork and obtain a CarFax report.
  6. Take it to a mechanic for evaluation of the car's condition.
  7. Negotiate when you are prepared to buy. Draw up a contract.