A bad credit auto loan is a car financing solution tailored to drivers with lower credit scores — typically, below 580. It’s important to avoid costly but common bad credit auto loan pitfalls by shopping around for the best rates available to you.

Key takeaways

  • When shopping for a bad credit auto loan prepare for potentially higher interest rates.
  • Securing financing with the help of a co-signer can provide more favorable rates for those with poor credit.
  • Buy-here, pay-here auto loans are not the only option for borrowers with poor credit.

What a bad credit auto loan is

A bad credit auto loan works just like any other auto loan. The only difference is the recipient’s credit score, which impacts the terms for which the borrower qualifies. Drivers with credit scores of around 580 or lower typically have a history of financial difficulties. They are considered a higher risk of default, and lenders may hesitate to offer an auto loan with favorable terms.

Bad credit lenders will consider your credit score, income and current debt load alongside the make, model, age and condition of the vehicle you’re interested in. Based on this information, the lender will determine your interest rate and the maximum amount you’re approved to borrow.

As with any other auto loan, you’ll repay the borrowed funds over a set term, and the car will be officially yours once it’s fully paid off.

How much you can borrow with a bad credit auto loan?

Your credit score can significantly impact the amount you can borrow. Because lenders see borrowers with lower credit scores as riskier, they are often less likely to approve larger loans. Saving up for a sizeable down payment can both help fill the financing gap and make you look like a more appealing customer to lenders.

If you’re looking to get a high-end vehicle but can’t get approved for the full amount, try checking out older model years. Buying certified pre-owned can eliminate some of the risks of buying used.

Getting a car with bad credit? Avoid these pitfalls

The best way to avoid bad credit auto loan traps is by doing a little research and determining how much car you can afford before even visiting a dealership. Be honest with yourself about your budget, and be sure you can afford the payments.

Prepare for a higher interest rate

The most desirable rates are reserved for borrowers with excellent credit scores. You will face much higher rates if you have a credit score in the 500s. 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. According to most recent Experian data, those with credit scores between 300 and 500 paid an average of 14.18 percent for new cars compared to 6.44 percent for prime borrowers.

Bankrate tip
Consider applying with the help of a co-signer with more favorable credit. This can significantly improve your available rates and terms.

Try to avoid buy-here, pay-here lots

Some dealerships will refuse to sell you a vehicle if you have bad credit. These buyers are buy-here, pay-here lots’ target audience. Many such lots advertise they’ll lend you funds without even running a credit check.

But these lots aren’t always the best choice. These loans often carry high rates, stacked fees and even the requirement to equip your car with a GPS unit for easy repossession. Instead, check out online lenders that cater to bad-credit buyers, such as Caribou or Autopay.

Don’t take the longest term available if you can help it

A longer term means a lower monthly payment, but it also means a more expensive loan overall. Furthermore, some lenders will charge you a higher interest rate if you opt for an extended repayment period because they perceive a greater risk of you defaulting. So it may be worthwhile to choose a shorter loan term if you can afford the higher monthly payment.

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.