How to get a car loan with bad credit
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Key takeaways
- Bad credit loans are offered by banks, credit unions, online lenders and through dealers.
- Before applying for a car loan with bad credit, it's worth improving your credit score to potentially qualify for more attractive loan offers.
- It's equally important to save up for a down payment, know what you can afford, shop around and get prequalified for financing.
If you have a low credit score, you may be worried that you won’t get approved for a car loan from a traditional lender. Before settling for a loan through a buy here, pay here dealer, research alternatives.
Buying a car with bad credit — a credit score between 300 and 579 — is possible, but it may be more challenging and expensive. However, the cost of your loan may be far lower with a bank, credit union or online lender than with a dealership.
Steps to get a car loan with bad credit
A lower credit score doesn’t mean you’re stuck with bad deals. Knowing your credit score and the average rates to expect and applying for preapproval are just a few of the many ways you can secure a budget-friendly car loan.
1. Know your credit score
Before you shop for financing, check your credit score. According to the FICO credit scoring system, which ranges from 300 to 850, any score below 580 is considered poor.
Your FICO score is calculated based on factors like how much you owe, the length of your credit history and your payment history. Not making your payments on time, consistently spending more than your available monthly credit and having a short credit history can all negatively impact your credit score.
Before applying for an auto loan, avoid opening new credit cards or loans. Making efforts to repair your credit score before you begin shopping will put you in a more favorable position with lenders.
2. Save for a down payment
If you have a lower credit score, making a down payment on a car can increase your chances of being approved for an auto loan.
A down payment can also offset higher interest rates and lower your loan-to-value ratio, helping you qualify for better terms. While a larger down payment is generally better, lenders may be willing to accept a down payment as low as $1,000. Even a small amount can help make auto loan payments more affordable and lower overall borrowing costs.
Experts recommend a down payment of at least 20 percent, but if that’s too much, just put down what you can afford.
3. Research
Prepare as much as possible so you’re not caught off guard when the time comes to negotiate. Before you apply for a loan, know the monthly payment you can afford and what annual percentage rate (APR) you can expect for your credit score.
With a bad credit score, you’ll likely be offered some of the highest advertised rates. According to data from Experian, borrowers in the subprime category (from 501 and 600) can expect an average rate of 11.72 percent for new cars and 18.49 percent for used cars.
| Credit score range | New car | Used car |
|---|---|---|
| Deep Subprime: 300 to 500 | 14.18% | 21.38% |
| Subprime: 501 to 600 | 11.72% | 18.49% |
| Near Prime: 601 to 660 | 8.99% | 13.49% |
| Prime: 661 to 780 | 6.44% | 9.06% |
| Super Prime: 781 to 850 | 5.07% | 7.09% |
It also helps to know the Kelley Blue Book (KBB) value of your preferred car if you’re buying used, or the MSRP set by the manufacturer if you’re buying new.
4. Shop around
Once you begin shopping, don’t limit yourself to just one lender. There are a variety of lenders that can help you secure a loan, and you can find the best rate by comparing multiple lenders.
- Banks and credit unions: If you already have a relationship with a bank or credit union, start here. Some banks and credit unions offer discounted rates for members and may be more willing to approve your loan if you have an established banking history.
- Online lenders: Many online lenders offer prequalification so you can see what terms you might be eligible for. Some lenders may also consider other details, like your employment history or education, when you apply.
- Car dealerships: You can finance through a dealership if you cannot secure a loan from another lender. However, dealerships often mark up the rates they offer to make more money off the deal. Because of this, it may be easier to qualify — but your rates will likely be less competitive.
- Buy-here, pay-here dealerships: Buy-here, pay-here dealerships can be useful if you don’t get approved by a bank or lender for a loan, but be cautious. While these dealerships may be more likely to approve someone with bad credit for a loan, the interest rates can be much higher.
5. Prequalify with lenders
Prequalification lets you see your eligibility for a loan before you apply and view estimated loan terms. It can save time and avoid unnecessary hard credit checks that briefly lower your credit score.
Once you’re prequalified with a few lenders, compare rates to find the best deal. You can then submit documentation and get preapproved with your top picks. It’ll result in a hard credit check, but a preapproved auto loan holds more weight as it represents the lender’s commitment to extend an auto loan to you. You’ll also have leverage in the dealership and can negotiate like a cash buyer.
All lenders will run a hard credit check during the application process. Prequalification allows you to preview your rate without this hard check. But as long as you keep applications to a 14-day period, your credit score won’t take multiple hits.
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. But subprime car loans can come with sky-high interest rates and can mean paying thousands of dollars extra in interest over the life of the loan.
Only consider subprime lenders if you cannot find another financing option. Buy-here, pay-here dealers should be used as a last resort once you’ve applied for loans from other, less expensive lenders.
7. Shop loan terms, not monthly payments
Lower monthly payments look good on paper and are usually used to entice buyers. However, they may lead to you paying more for your car over the life of the loan since they come with longer terms. Because car loans for bad credit have higher APRs, you may end up paying thousands more than the car’s full value by the end of the loan because of interest accumulation.
When shopping, look for the most favorable terms — usually the lowest APR over the shortest period. That way, you will have more manageable monthly payments with reasonable interest rates. This is where prequalification and preapproval come in handy.
8. Consider a co-signer
Consider asking a trusted friend or family member to be a co-signer on your car loan. Ideally, this individual should have a steady source of income, a strong credit score and an exceptional credit history.
Co-signers reduce lenders’ risk because the co-signer is responsible for the loan if you can’t make payments. A co-signer can be a strong negotiating tool and may result in a lower interest rate. However, the co-signer’s credit score can suffer if the loan becomes delinquent — even though they don’t own the vehicle.
9. Bring a friend to the lender
Ask a friend or a relative to go with you to the lender’s office, says Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the negotiating table can help inspire confidence. Confidence, combined with knowledge, can lead to more favorable loan terms.
10. Look out for add-ons
According to Josh Frank, former senior researcher for the Center for Responsible Lending, subprime buyers are more likely to encounter lending contracts with nonessential goods and services. Other costs, such as car insurance rates, can pile up if you have bad credit.
Never agree to a loan contingent on purchasing any add-on, such as extended warranties, after-market services or car insurance. Be aware of these add-ons, especially if you apply at a buy-here, pay-here dealership or plan to trade in your vehicle. And understand that rolling these costs into your loan means you may borrow more than the vehicle is worth, putting you more at risk of being upside-down on your loan.
11. Be sure the terms are final
If you finance through a dealer, always confirm the terms are final before signing. A dealer may offer you conditional approval so you can drive off the lot, but be wary. Since the terms of your loan aren’t set, you may face higher monthly payments than you initially agreed to.
Some shady dealers will entice car buyers with low advertised rates but raise rates after the buyer signs a contract. This deceptive practice is called yo-yo financing. And while it may seem similar to conditional approval, the practice is illegal.
Where to find a bad credit car loan
Car loans are available through most banks, credit unions and online lenders. You can also use dealership financing, but you’re more likely to get a bad credit loan with reasonable terms through an online lender.
In fact, many online lenders offer bad credit auto loans with competitive rates and generous repayment terms to consider.
Next steps
If you have bad credit, it may be tougher for you to get a car loan. You could also face less favorable terms or even predatory lending practices.
The good news is that research, saving up for a down payment and getting preapproved may help you get the best deal on an auto loan.
If you find a car loan that’s right for you, make timely payments to help boost your credit score. Consider refinancing to a loan with better terms after your credit score improves.
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