Repairing bad credit with an auto loan is an increasingly desirable option as more and more businesses, credit rating agencies, employers, insurance companies, and housing agencies are basing decisions on whether to approve, hire, or work with you based on your credit score.

A good score in this economic climate is 710 or better. If yours is less than that, an auto loan could help you improve your score by as much as 100 points.

Aside from home mortgage payments, auto loans offer the best opportunity to significantly and quickly increase your score. A $300 car payment will increase your credit score more quickly than a $30 credit card payment. Typically, a lender (or employer or landlord) considers a consumer who maintains an auto loan is someone who shows stability and commitment.

Thus if your credit score increases by 100 points, you will have more freedom and more choices in many areas of life (where you live, where you work, etc.)

Overall, it takes commitment and discipline to pay your bills on time and to overcome the need for immediate gratification and living beyond your means. Adopt a family budget starting with a monthly auto loan payment option that is realistic – taking into consideration your monthly income level and expenses.

In most cases, this also means driving a less expensive car. If you want to repair bad credit, it is important to make a short-term sacrifice (average car = affordable payment = improved credit = more choices in the future) vs. supporting a lifetime habit of over-spending.

To understand the world of bad credit auto loans it’s important to first look at how the definition of bad credit has changed, especially in recent years.

Prior to the current economic crisis, prime credit was a score of 650-800 and sub-prime was 550-650. What we refer to as the “unbankable” customer, or “buy here pay here”, was a score of 400-550.

Since the financial collapse and industry consolidation, particularly in the sub-prime market, those credit scores have been redefined.

Prime is now 710 or better and the few sub-prime lenders out there are looking for 630 or higher with large down payments (25-30%). That has dumped a huge number of people into the “unbankable” market.

Consumers now have far fewer options when it comes to their cars. They can either service the cars they have and keep them running for as long as possible, or the cars are failing because of wear and tear and must be replaced.

When it comes to replacing a vehicle, consumers with bad credit have two options:

• Pay cash ($3000-$5000), an increasingly difficult option, or
• Find a reputable dealer that specializes in this market (typically falling under the buy here pay here category)

Because of industry consolidation, a lot of people are getting into the buy here pay here business – some just within the last year – while some have been at it for decades.

Consumers need to be careful and choose a buy here pay here dealership wisely, preferably one with an established reputation and many years in business.