Debt settlement eliminates unsecured debt, such as credit cards, by allowing you to pay off the accounts for less than what you owe. It is a common strategy for clearing excessive debt while avoiding bankruptcy. Bankruptcy is the most damaging form of debt management, but debt settlement is harmful as well and could affect your ability to finance a car purchase at a reasonable interest rate.
Interest Rates
Automobile loans are available for virtually every credit score, and accounts listed on your credit report as settled are unlikely to keep you from being approved if you meet other qualifications. Some auto lenders approve people regardless of credit as long as they have proof of income and are willing to authorize electronic deductions from their checking account for payments. The loans are considered bad-credit auto loans and sometimes feature high interest rates of more than 18 percent.
Credit Scores
Multiple debt settlements---or even one---could drop your credit score into a category with bad-credit borrowers. Credit scores range from 350 to 850, and most borrowers with bad credit have scores below 620. Debt settlement easily can drop scores below that level. Credit scores fall during debt settlement because credit card companies and others will not settle debts until they are delinquent. There simply is no reason for a creditor to settle a debt that is current. Usually, unsecured creditors consider debt settlement after accounts are two to six months behind. Each missed payment before settlement damages credit scores.
Credit Reports
Settled accounts are listed on credit reports as "settled for less than the full balance," according to Black Enterprise magazine. This is considered very negative credit information and could make it impossible to purchase a car at a favorable interest rate while the settlement is recent. Settlement information remains on credit reports for seven years, but is less damaging over time. Someone considering a car purchase with financing should wait a while following a settlement to do so. Credit repair is possible in about two years after settlement. For some people that's a long time to wait, but purchasing a cheap used car for cash is sometimes preferable to taking out a big loan at a huge interest rate.
Shopping
People who must purchase a car on credit with settlement should shop for the loan first, and then the car. Working with a bank or credit union on the loan is much better than shopping through the dealer. Dealers may intentionally steer bad-credit buyers to overpriced cars, as they describe the cars as the only models available for "special" financing. Being turned down by banks and credit unions because of settlement activity or a poor credit score is a sign that credit repair is necessary before shopping for a car on credit.
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