Simply, a bad credit loan is a loan tailored specifically to drivers that are in the poor credit bracket — typically defined as a FICO score below 580. To get the best rate when taking out a bad credit auto loan it is important to shop around and do extra research.
What a bad credit auto loan is
A bad credit auto loan is an auto loan — like any other loan — granted to borrowers with low credit scores. Drivers with credit scores of around 580 or lower typically have a history of financial difficulties and are considered a higher risk of default, and lenders may be hesitant to offer an auto loan with terms that are favorable for borrowers.
The best ways to find a bad credit auto loan
Finding an auto loan with favorable terms isn’t easy. Auto loan lenders typically prefer to work with drivers with good credit, who are seen as less risky.
Learn which lenders offer loans to drivers with bad credit and do your research on those lenders. Then, compare APR and loans from a few different lenders to ensure you get the best deal.
How bad credit auto loans work
When you have bad credit, you can still qualify for an auto loan. And in many ways bad credit auto loans work much the same as auto loans for drivers of any other credit bracket.
The lender will take into consideration your credit score, income and general financial situation alongside the make, model, age and condition of the vehicle you’re interested in. Based on this information, the lender will determine a monthly payment amount that you’re approved to borrow, your interest rate and the term of the loan.
How much you can borrow
Your credit score can have a significant impact on the amount you can borrow. Because lenders see borrowers with lower credit scores as riskier, they are often less likely to approve larger loans.
If you’re looking to get a high-end vehicle, but can’t get approved for the full amount, it may be worth checking out older model years. Buying certified pre-owned can eliminate some of the risk on your end when it comes to buying used.
Steps to getting a bad credit auto loan
But just because you have bad credit doesn’t mean you won’t be able to get an auto loan. There are steps you can take to improve your chances of getting the best deal available.
1. Improve your credit score
Your credit score plays a huge role in determining what type of loan you can get — and the higher your credit score, the better your loan terms.
If you can afford to hold off on purchasing your car, take small steps to improve your credit. Paying down existing debts or getting monthly payments to utilities or rent counted towards your credit score can help raise your score and make your application look better.
Don’t forget you can review your credit report for mistakes too. You may need to wait up to 30 days for any corrections to be made, so it’s worth checking well before you’re ready to buy.
2. Shop around
Don’t limit yourself to just the car dealership. Go to your local banks, credit unions and check online. Check the eligibility requirements for each before you get a quote to make sure you meet any minimum qualifications that are advertised.
Save “buy here, pay here” dealerships and bad-credit dealers as a last resort. You’ll likely receive worse terms than you would if you were to apply with an establishment where you already have an account.
3. Be prepared to pay more
Because of your credit, you are going to have to pay a higher interest rate. Apply for prequalification with the lenders that you find and compare both the rates offered and how much total interest you’ll pay. A longer term results in a lower monthly payment, but it also means a more expensive loan overall.
4. Take your time
Taking your time is also important when you are shopping for your car. Search current listings and compare prices at different dealerships to ensure you’re getting the best deal.
The market is currently a tough one, so you may not be able to find your ideal car right away. If you can wait, it may be worth stretching out the car shopping process. Most preapprovals last for 30 days, which means you can take your time.
How to avoid bad credit auto loan pitfalls
The best way to avoid bad credit auto loan pitfalls is by doing a little homework before stepping foot on the car lot. And determine how much car you can afford before even visiting a dealership. Be honest with yourself about your budget and be sure you are going to be able to afford the payments.
Don’t assume you’ll qualify for the best interest rate
The most desirable rates are reserved for borrowers with excellent credit scores. If you have a credit score in the 500s, you will face much higher rates. If you can hold off on purchasing a car, you may be better off working on improving your credit to qualify for a lower interest rate.
Don’t assume all dealerships will offer a bad credit auto loan
Some dealerships will refuse to sell you a vehicle if you have bad credit. And don’t count on all dealerships offering the same financing options: some will have more flexible options than others.
Don’t assume you can’t get help from a credit union
Some credit unions offer bad credit auto loans. You’ll still have to meet the underwriting requirements set by these lenders, but you may qualify for more favorable terms than you’d get at a dealership.
Don’t take the longest term available if you can help it
If you can’t afford the monthly payment for a higher amount, you may be tempted to take a longer term. But that will mean you are obligated to pay more interest. Try to pay off the car loan as soon as possible by taking a shorter term.
The bottom line
If you’re looking to buy a vehicle, it’s critical to understand your credit and what you can expect to qualify for. But it’s not just your credit score that will determine if you get a loan. The financing options available will vary, and it’s important to shop around.