Can I get a car loan while on a debt management plan?
Yes, but it may be harder to get approved
+1 more
A debt management plan (DMP) can help you get your debt under control, but what happens when you need a car loan? It is possible to get a car loan on a debt management plan. Whether or not this is a good idea largely depends on your total existing debts, credit score, the lender you choose and other factors.
So-called “bad credit” lenders may give you an auto loan, but you will likely face high interest rates.
Jump to insightA debt management plan may temporarily lower your credit score, but it can also improve your credit score over time as you establish a regular payment history.
Jump to insightInstead of getting a bad credit car loan, consider saving a down payment, trading in your current vehicle, getting a co-signer or using a home equity loan to finance your purchase.
Jump to insightUnderstanding debt management plans
A debt management plan (DMP) can consolidate your debts into one monthly payment and help you get out of debt within a few years. Plans are typically managed by a credit counseling service — a nonprofit organization that provides financial guidance and support to those struggling with debt, typically collateral-free debt, such as credit cards, medical bills, student debt and other unsecured loans.
A debt management plan generally lasts three to five years.
When you start a plan, you are assigned a credit counselor to negotiate a payment structure, ideally with lower fees or a better interest rate. Then, you make just one monthly payment to your counselor, who then distributes payments to your creditors. You can also benefit from educational resources and financial support designed to prevent you from falling into debt again.
» MORE: Good debt vs. bad debt
Can you get a car loan on a debt management plan?
You may not get the most competitive rate, but you are typically not automatically denied, either. The fact that you are enrolled in a DMP shows a commitment to financial responsibility, which is something lenders may consider when reviewing your application. With bad credit, you may be faced with a high-interest loan, but you can always refinance your car in the future once your credit score has improved.
It is possible to get a car loan on a debt management plan, as lenders consider other factors beyond your credit score. Lenders instead evaluate your income and total debt to determine if you will be able to make your monthly payments.
But should you?
It is generally not recommended that you take on additional debt while enrolled in a debt management plan. However, if you need to buy a car with bad credit, it is possible to get an auto loan as long as the DMP agreement does not prohibit you from taking on a new line of credit.
Before you apply for a car loan, think about whether now is the best time to buy a new car. If your car is still in good condition, try to wait until your plan is complete or at least until you have less debt so your monthly payments are more manageable.
Alternative car financing options
A traditional car loan is not your only option for vehicle financing. Consider one of these options to help cover the bill.
- Pay more upfront: It’s worth taking some time to save for a down payment. It will reduce the total amount you have to finance, saving you money in interest. Some lenders may even require that you make a down payment if you have bad credit.
- Get a co-signer: Having a co-signer with good credit could get you better terms for your car loan. Ask a family member or trusted friend to co-sign on your loan. Remember that this person is responsible for your loan if you default, so it is critical that you make your payments on time.
- Trade in your old car: You can also reduce the amount you borrow when you trade in your current vehicle. Be sure to check your car’s value to help ensure you get a fair price.
- Consider home equity: If you have built up equity in your home, you could get a home equity loan or home equity line of credit (HELOC) to purchase your car. However, your home serves as collateral, so you risk losing your property if you default on the loan. There are also fees and closing costs that accompany this kind of loan, making it a more expensive option.
No matter what you choose, be sure to compare lenders to get the best interest rate for your car loan. You may be able to get a loan through your bank or credit union, so be sure to check before visiting the dealership. If not, the dealership may be able to get you a loan. You can also prequalify with online lenders to see if that is a better option for financing.
FAQ
Why is it harder to get a car loan on a debt management plan?
It is not necessarily harder to get a car loan on a debt management plan because lenders consider several factors beyond just your credit score. There are bad credit loans available that may be more forgiving in their requirements than traditional auto loans.
How does a debt management plan impact your credit?
A debt management plan helps you improve your credit in several ways:
- Better payment history: It establishes a regular payment history, which accounts for 35% of your score.
- Longer credit history: A debt management plan keeps your accounts from being charged off, thus establishing a credit history of open accounts over time.
- Improved credit utilization rate: If you take on too much debt, your credit utilization ratio increases, but as you pay off debt, your ratio improves — and your credit score, in turn.
You may experience an initial decrease in your credit score, but it typically bounces back as you continue paying down your balances. Additionally, your credit report may note that your accounts are being paid by a third party (your credit counselor).
» RELATED: How to get a debt consolidation loan with bad credit
Why might a debt management plan be worth it despite loan challenges?
A debt management plan lets you work with a financial advocate who may be able to negotiate fewer fees, a lower interest rate and even a lower balance with your creditors. It also allows you to combine your debts into one monthly payment, making the repayment process much easier.
» MORE: Debt relief pros and cons
What steps can improve my chances of getting a car loan on a DMP?
You can fix your credit by making timely payments, paying down debt and keeping an eye on your credit report to ensure your payments are being reported to the credit bureaus. Be sure to carefully research your lender, take the time to prequalify and ask your lender about any incentives or rebates that could lower the cost.
» LEARN: How to manage your money
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from reputable publications to inform their work. Specific sources for this article include:
- Experian, “Is a Debt Management Plan Right for You?” Accessed Jan. 16, 2025.
- Federal Trade Commission, “Getting Help When You’re in Debt.” Accessed Jan. 16, 2025.
- InCharge Debt Solutions, “New Credit on a Debt Management Plan.” Accessed Jan. 16, 2025.
- Chase, “How do lenders decide my auto loan interest rate?” Accessed Jan. 16, 2025.
- FICO, “How are FICO Scores Calculated?” Accessed Jan. 16, 2025.
- FICO, “How a Debt Management Plan Can Impact Your FICO Scores.” Accessed Jan. 16, 2025.
