Nine steps to a car loan on damaged credit

Bad credit doesn't mean you can't buy a car, and doesn't automatically mean you can't get a car loan with terms that don't break your monthly budget.

Like everything else, "bad" is a matter of opinion and degree. If the score is borderline, some lenders might still smell a good prospect while others, with slightly different criteria, would see more risk.

Most important: Shop around. "Some car loans are being made at 18% and 20%," says Phil Reed, senior consumer advice editor for Edmunds.com. "You don't want to have the attitude of 'just get me a loan.' There are still deals to be made."

It's also a good time to be looking, says Jack Tracey, the executive director of the National Automotive Finance Association. Credit is loosening up and, for borrowers searching for a nonprime auto loan, "It's become easier than it was earlier this year and late last year," he says. "The economy is improving, and some of the financing sources are coming back into the market."

Here are nine strategies to help you find the best subprime auto loan:

1. Don't assume the worst

Don't take someone else's word that your credit is bad. Pull your three reports for free at AnnualCreditReport.com. Then go to MyFICO.com and pay a few dollars for your one-time Equifax and TransUnion FICO scores. Even two candidates with an identical score might not be the same in the eyes of a lender, says John Van Alst, staff attorney for the National Consumer Law Center. "Even if your score is tarnished, you may have a better chance than someone with the same score and no (credit) history," he says.

2. Shoot high

Keep in mind: Because auto loans involve less money over a shorter period of time -- and a car is easier to repossess than a house -- the same credit score that might have put you in a subprime mortgage loan could bring you a prime or near-prime auto loan. If you actually have good credit and apply for a subprime loan, it's likely that you will get less favorable terms than you deserve.

3. Shop around

Some lenders will see your tarnished history in a more positive light than others. "That's where it becomes more important to shop around," says Reed. But be careful if a lender or lot caters specifically to subprime customers, he says. "Seeing places that are appealing specifically to subprime is a little bit of a warning flag."

4. Start close to home

"Even if you don't think you can get a loan, go to your bank, go to your credit union first," says Van Alst. Apply at the bank where you have a checking account or your credit union. And see if your employer or insurance company offers auto financing.

5. Seek out car-finance lenders

Check out sources known for auto loans, rather than lenders known for catering to low-credit clients. This can include name brand national banks, local and regional banks, and well-known online lenders.

6. Don't go it alone

Ask someone to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Not only does it help to have an extra set of eyes and ears, but you can give your partner a role to play -- such as acting unimpressed, dubious or critical of the loan terms.

7. Shop loan terms, not monthly payments

Look for the cheapest money -- the lowest APR over the shortest period. Don't be distracted by promises of a lower monthly payment over a longer period of time, says Van Alst. And if you need an 84-month loan, "you can't afford that car," says Anthony Giorgianni, associate finance editor of the Consumer Reports Money Adviser newsletter.

8. Look out for add-ons

Nonprime buyers are more likely to encounter lending contracts stuffed with nonessential goods and services, says Josh Frank, senior researcher for the Center for Responsible Lending in Durham, N.C. Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even insurance, says Frank.

9. Beware of the 'yo-yo.'

If you finance through a dealer, make sure the terms are final, not contingent or conditional, before you sign and drive away. All too often buyers are told days or weeks later that their monthly payments or the required down payment has been increased. It's sometimes known as a "yo-yo sale," Frank says. Among the general population it happens to about one in every 22 buyers, according to an April 2009 survey from the Center for Responsible Lending. Among buyers with bad credit it's one in nine.