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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. But before settling for a loan through a buy-here-pay-here dealer, consider researching all your options.
Although having bad credit — a credit score between 300 and 500 — can make getting a car loan more challenging, it isn’t impossible. Plus, you’ll find that borrowing costs are far lower with a bank, credit union or online lender, regardless of your credit score.
Steps to get a car loan with bad credit
Prepare on several fronts before you start the process of applying for an auto loan with bad credit. Pay special attention to your credit score and be sure all terms are finalized before the purchase goes through.
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.
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 securing and getting approved for an auto loan.
Setting aside some extra cash each month for a down payment can also offset higher interest rates caused by a less-than-stellar credit score and can lower your loan-to-value ratio, helping you qualify for better terms.
Experts recommend a down payment of at least 20 percent, but if that’s too much, just put down what you can afford. You may find that some dealers who work with credit-challenged customers will accept a down payment as low as $1,000.
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 what monthly loan payment you can afford and what APRs are common among auto lenders. With a bad credit score, you’ll likely be offered some of the highest advertised rates.
If you’re buying used, it also helps to know the Kelley Blue Book value of your preferred car.
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, including:
- 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.
- Online lenders: Many online lenders offer a prequalification tool on their websites, which allows you to see what terms you might be eligible for before applying. This can save you a hard credit check if you don’t meet the requirements.
- Car dealerships: You can finance your car through a dealership if you meet the financial and credit criteria. You’ll meet with a finance department representative, and they will send your information to different lenders. Some dealerships may also offer programs for borrowers with a bad credit history. However, dealerships often mark up the rates they offer to make more money off the deal.
- 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.
Lenders run a hard credit check during the application process. It’s wise to consider at least three different lenders in a 14-day period so your credit score doesn’t take multiple hits.
5. Prequalify with lenders
Prequalification lets you see if you’re eligible for a loan before you apply and view estimated loan terms. Plus, you’ll save time in applications and avoid unnecessary hard credit checks that can negatively impact your credit score.
Once you’re pre-qualified with a few lenders, you can submit documentation and get preapproved. 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. Be sure the terms are final
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.
7. Shop loan terms, not monthly payments
Lower monthly payments look good on paper and are usually used to entice buyers. 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 you’re 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. If you cannot find a low APR, 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 knowledge, can lead to more favorable loan terms.
Consider asking a trusted friend or family member to be a co-signer. Ideally, this individual should have a steady source of income, a strong credit score and an exceptional credit history.
Co-signers reduce much of the risk for lenders — because the co-signer is 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.
9. Look out for add-ons and scams
Nonprime 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 for nonprime buyers.
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 need to apply at a buy-here, pay-here dealership or you plan to trade in your vehicle. And understand that rolling these costs into your loan means you’ll pay more interest over the loan term.
10. Be sure the terms are final
If you finance through a dealer, always ensure the terms are final before signing. If you don’t, you may face higher monthly payments.
Some shady dealers tell car buyers their financing is not complete well after the customer finalizes the purchase, and they must accept a higher interest rate or return the car. This is called yo-yo financing.
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, as discussed above. But if you have bad credit, you’re more likely to get a loan with reasonable terms through an online lender.
Some credit unions will also approve you for a bad credit car loan if you have a good history with their institution.
Check out Bankrate’s picks for the best bad credit auto loans to explore options.
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 have fewer options if your credit score is lower. However, your borrowing costs will likely be much higher due to the risk you pose to the lender.
Here’s a breakdown of the current average interest rates by credit rating from Experian’s State of the Market report for the third quarter of 2022:
|Credit score range||New car||Used car|
|Deep Subprime: 300 to 500||12.93%||19.81%|
|Subprime: 501 to 600||10.11%||15.86%|
|Near Prime: 601 to 660||7.25%||9.81%|
|Prime: 661 to 780||4.90%||5.47%|
|Super Prime: 781 to 850||3.84%||3.69%|
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 conducting research, saving up for a down payment and getting preapproved help you prepare to get the best deal on an auto loan.