If you have a bad credit score, you might be worried about finding a car loan with favorable terms. Getting a car loan with bad credit can be a tricky business. Some lenders may only consider you for subprime car loans, which often come with less favorable terms and higher monthly payments.
But don’t lose heart. Even if your credit score needs work, you can still find a car loan that doesn’t break your monthly budget. And making consistent payments toward a car loan is a great way to repair credit.
Here are nine tips for getting a car loan with bad credit.
1. Know your credit score
Before you begin the shopping process, it’s important that you know your credit score. On Bankrate, you can get your free credit report and credit score, and also learn more about the factors behind your score.
There may be factors you’re able to address immediately, like making delinquent payments. Taking action to repair your credit score before you begin shopping can help you find a more favorable position with some lenders.
2. Research, research research
It’s important that you prepare as much as possible so you’re not caught off guard when the time comes to negotiate.
Research should include key terms, like Annual Percentage Rate (APR), which refers to a loan’s yearly interest rate. If you’re buying used, it also helps to know the Kelley Blue Book value of your preferred car.
Our auto loan resources page offers a wide variety of articles, quizzes and calculators, all designed to help you make a more informed purchase.
3. Shop around
Once you begin the shopping process, don’t just limit yourself to just one lender. There are a variety of lenders that offer car loans for bad credit. And they may want to compete for your business.
Even two candidates with an identical credit score may not be the same in the eyes of a lender, says John Van Alst, staff attorney for the National Consumer Law Center. “Even if your score is tarnished, you may have a better chance than someone with the same score and no (credit) history,” he says.
Don’t dawdle — lenders run a hard credit check during the application process. Hard credit checks signal to credit bureaus that a borrower is about to take on more debt, and can result in a dip in your credit score. Draw out the process for too long, and it could become more difficult to negotiate favorable terms.
To be safe, we recommend visiting around three different lenders in a 14-day period.
4. Pre-qualify with banks and credit unions
“Even if you don’t think you can get a loan, go to your bank, go to your credit union first,” Van Alst says. One of your most powerful negotiating tools can be pre-qualifying for a loan from a bank or a credit union.
If you have a bad credit score, it may be difficult to pre-qualify for a car loan with bad credit at a bank. Banks are for-profit organizations and are usually more restrictive in who they lend to. But if you have a relationship with your bank, you may have more luck in finding a manageable car loan.
Credit unions are nonprofit organizations usually owned by their members. As a result, they may be more open to lending to a borrower with bad credit. Credit unions do require that their account holders be members, but membership requirements can be easy to meet.
5. Be sure the terms are final
If you finance through a dealer, always make sure the terms are final before you sign. If you don’t, you may face higher monthly payments or an increased down payment in the future.
It’s known as a “yo-yo scam.” Dealers tell car buyers their financing is not complete and they must accept a higher interest rate.
6. Avoid subprime lenders
Subprime lenders can seem like a sure bet to anyone wondering how to get a car loan with bad credit. These lenders usually cater to customers with lower credit scores and can make the car buying process seem easy and stress-free — at first.
Subprime car loans can come with sky-high interest rates and aren’t likely to help you improve your credit score. Many subprime loans also use your vehicle as collateral. So if you fail to make payments, you risk losing your car altogether.
Always do your research beforehand, and only consider subprime lenders if you are unable to find another financing option.
7. Shop loan terms, not monthly payments
Lower monthly payments look good on paper and are usually used to entice buyers. In reality, they may lead to you paying more for your car over the life of the loan. Because car loans for bad credit can come with higher APRs, you may end up paying more than the car’s full value by the end of the loan.
When you’re shopping, look for the most favorable terms — usually the lowest APR over the shortest period of time. That way, you’ll have more manageable monthly payments with reasonable interest rates. If you’re unable to find a low APR, you may want to consider shopping for a different vehicle.
8. Bring a friend with you — and consider a co-signer
Ask a friend or a relative to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the negotiating table can help inspire confidence. And confidence, combined with know-how, can lead to more favorable loan terms.
If this is someone that you really trust, consider asking them to be a co-signer. Co-signers reduce much of the risk for lenders — they’ll become responsible for the loan should you default on your payments. Adding a co-signer can be a strong negotiating tool, and usually results in a lower interest rate.
Be absolutely sure you can make payments before taking on a co-signer. If you fail to make payments and the debt falls on them, it can permanently damage your personal relationship
9. Look out for add-ons and scams
Nonprime buyers are more likely to encounter lending contracts with non-essential goods and services, says Josh Frank, former senior researcher for the Center for Responsible Lending. Other costs, such as car insurance rates, can pile up for nonprime buyers.
Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services, and even car insurance.
Bad credit doesn’t have to result in bad terms
Unfortunately, if you have bad credit, it may be tougher for you to get a car loan. You may face less favorable terms or even predatory lending practices.
The good news is that coming to the negotiating table with preparation and research can help you find a loan with a much lower rate. First, find the loan that’s right for you, and pay it off to help boost your credit score. At that point, consider refinancing. You might find a loan with even better terms.