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How to get a car loan with bad credit

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If you have bad credit, getting a car loan may be hard, but it isn’t impossible. The most important aspect of getting a bad-credit auto loan is researching your options to find a loan that will best serve you, regardless of your credit score. 

10 tips to getting a car loan with poor 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 consists of a few categories, 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. 

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Bankrate tip
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. 

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 exactly 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 representative of the finance department, and they will send your information to different lenders. Some dealerships may also offer programs for borrowers with a bad credit history. 
  • 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 they should be approached with caution. While these types of dealerships may be more likely to approve someone with bad credit for a loan, the interest rates can be much higher.  
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Bankrate tip
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 allows you to see if you’re eligible for a loan before you apply. With prequalification, you’ll save time in applications and avoid unnecessary hard credit checks.  

Multiple hard credit checks have a negative impact on your credit score, and if you already have less-than-desirable credit, it’s always worth prequalifying with a few lenders. But prequalifying doesn’t guarantee approval, or the exact rate and term given. 

6. 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. 

This is known as a yo-yo financing: 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. 

7. 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. 

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Bankrate tip
Only consider subprime lenders if you are unable to find another financing option.

8. 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, 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’re unable to find a low APR, you may want to consider shopping for a different vehicle. 

9. 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. 

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 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. 

10. 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 allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even car insurance. Be aware of these add-ons, especially if you need to apply at a buy-here, pay-here dealership or you’re planning on trading in your vehicle. 

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 at a much lower rate. First, find the loan that’s right for you and pay it down consistently to help boost your credit score. At that point, consider refinancing; you might find a loan with even better terms. 

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Written by
Hanneh Bareham
Student loans reporter
Hanneh Bareham specializes in everything related to student loans and helping you finance your next educational endeavor. She aims to help others reach their collegiate and financial goals through making student loans easier to understand.
Edited by
Student loans editor