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Can You Get a Car Loan while in Credit Counseling?

It can be very difficult to get a car loan while in credit counseling. Your credit score will not be the problem; rather, your credit report will have a note on each account stating that the account is included in a credit counseling agreement or a debt management plan (DMP). This note could keep lenders from approving you for financing.

Why Does this Note on Your Credit Report Matter?

Your credit score may be strong enough to obtain a car loan, but the note mentioned above usually causes a denial. Many creditors view the note for the truth that it is:  you needed assistance managing your debt. Why you need credit counseling doesn’t matter–to many lenders it is simply a red flag that your loan is too risky. Additionally, credit counseling is mandatory for everyone wishing to file Chapter 7 bankruptcy. That leads many lenders to view credit counseling as a sign that you are on the brink of a bankruptcy filing, so they will shy away from offering you new loans. This may seem a bit unfair to you, but lenders are by nature very risk adverse and look to protect themselves at all times.

Alternative Options for Those in Credit Counseling

Your first option is to shop around for a loan. When you apply for a loan, a lender does a hard inquiry of your credit report. Each hard inquiry lowers your credit score by five points, but if you apply to multiple banks for the same loan during a two or three week period, all of the inquiries are lumped into one. So, you only lose five points for shopping your loan around. Even so, you will have difficulty convincing a large traditional lender to offer you a car loan, as some have strict policies against working with people in debt management or credit counseling programs.

However, there are lenders that specialize in higher-risk loans. They may be willing to overlook the credit counseling notation on your credit report, though you will need to expect a high interest rate and short repayment terms. For this reason, you’ll want to opt for an economical vehicle with low monthly payments. Try to spend no more than 20% of your annual income on this vehicle. 

Your second, and perhaps wiser option is to complete the credit counseling process and finish your DMP prior to buying a car. Once through the process, you may have obtained the skills needed to prevent debt overload in the future and the notation on your credit report will have been removed.