What Is a Credit Amnesty?

This ruse is as old as the hills. While you'll see credit amnesty offers in television and radio advertising, you're most likely to find them online. If you come across a solicitation offering credit amnesty, hopefully the term "buyer beware" will quickly come to mind.

Credit amnesty, in the strictest sense, is a misnomer. Amnesty means an official pardon. Credit rating agencies do not grant amnesty when calculating your credit score -- commonly known as your FICO score. Credit amnesty is a marketing term used to describe a bad-credit or no-credit loan. The term -- most often seen in used-car advertising- - is just one of the many lenders will use to try to lure you into their dealerships. It's just another way of saying that the dealer can get yet you into a car no matter what your credit situation is -- even if you've declared bankruptcy in the past.

When you take out a loan to buy a car, you are taking out a secured loan similar to the mortgage on a home, meaning the car becomes collateral. If you fail to pay as promised, the dealer can simply repossess the car. While repossessing a home can be complicated, repossessing a car is generally not. When it comes to lending, it's mostly about risk. In this case, the dealership, or the bank it has an arrangement with, will float you a loan even if you have a bad credit history or no credit history at all. However, you are likely to pay dearly for the privilege of doing business with them.

Though a credit amnesty plan may allow you to avoid the usual credit check required when taking out a car loan, you will still need to provide verifiable proof of steady income, and you will likely be required to make a significant down payment. You should expect vehicle selection to be limited to older models with high mileage and a higher likelihood of breaking down. Finally, it's nearly certain that you'll be offered a very high, sub-prime interest rate. The kicker, of course, is that if you default on the debt, you will not only lose the car, your credit score will take another significant hit.

If you simply must have that vehicle now, you'll be well served to consider other options for financing it. One would be to find a co-signer with a good credit score. Remember, however, that the co-signer must be willing to shoulder most of the financial liability for the loan. When you apply for credit with a co-signer, you are essentially opening a joint account. A default will have a significantly negative impact on your co-signer's credit score. The best alternative option, if you haven't already exhausted it, might be to borrow money from family or friends.