How to get a car loan with bad credit

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 average rates and applying for pre-approval are two of many ways you can secure a budget-friendly car loan.

1. Know your credit score

Before you begin the shopping process, check your credit score. According to the FICO credit scoring system, which ranges from 300 to 850, any score that falls 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.

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 five percent. Even a small amount can help offset the cost of buying a car.

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 can expect an average rate of 11.72 percent for new cars and 18.49 percent for used cars.

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 the shopping process, 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 if you’re eligible 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 when walking into the dealership and can negotiate like a cash buyer.

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.

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. And confidence, combined with knowledge, can lead to more favorable loan terms.

10. Look out for add-ons

Subprime buyers are more likely to encounter lending contracts with nonessential 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 if you have bad credit.

Never agree to a loan that’s 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 ensure 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.

Multiple lenders offer bad credit auto loans with competitive rates and generous repayment terms to consider.

Bad credit car loan APRs

Borrowers with good or excellent credit get the most competitive auto loan offers. That doesn’t mean you’ll automatically break your budget if your credit score is lower. Start by calculating the total cost of a car loan before you buy. While the APR may be high, you can adjust your loan term and the amount you borrow to match your budget.

Next steps

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 research, saving up for a down payment and getting preapproved will help you get the best deal on an auto loan.

If you find a loan that’s right for you, make timely payments to help boost your credit score. At that point, consider refinancing to find a loan with better terms.