How to get a car loan with bad credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by offering interactive tools and financial calculators, publishing original and objective content, by enabling users to conduct research and compare information at no cost – so that you can make informed financial decisions. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this site are from companies who pay us. This compensation may impact how and where products appear on this site, including such things as the sequence in which they appear in the listing categories in the event that they are not permitted by law for our mortgage, home equity and other home loan products. This compensation, however, does not influence the content we publish or the reviews you read on this site. We do not include the universe of companies or financial deals that might be open to you. Anna Kraynova/Getty Images
6 min read . Published March 02, 2023.
The writer is Hanneh Bareham. Written by Student loans reporter Hanneh Bareham specializes in everything that is related to student and personal loans and can help you finance your next endeavor. She is determined to assist others reach their collegiate and financial goals by making loans more understandable. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to manage their finances with precise, well-studied and well-researched data that breaks down complicated subjects into bite-sized pieces. The Bankrate promise
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You have money questions. Bankrate can help. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate adheres to a strict code of conduct policy, which means you can be confident that our content is honest and reliable. Our award-winning editors, reporters and editors create honest and accurate content to help you make the best financial decisions. The content we create by our editorial team is objective, factual, and not influenced through our sponsors. We’re open regarding how we’re capable of bringing high-quality content, competitive rates and helpful tools to our customers by revealing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for placement of sponsored products and, services, or by you clicking on specific links on our website. So, this compensation can affect the way, location and in what order items are displayed within the categories of listing in the event that they are not permitted by law. This is the case for our mortgage, home equity and other products for home loans. Other elements, such as our own rules for our website and whether a product is available within the area you reside in or is within your personal credit score could also affect the way and place products are listed on this site. Although we try to offer the most diverse selection of products, Bankrate does not include specific information on each credit or financial products or services. If you have a low credit score, you might be worried that you won’t be able to get an auto loan from an established lender. However, before you take out a loan through a dealer who buys-here-pay-here think about researching all possible alternatives. While having bad credit — a credit score that is between 300 and 500 — may make getting a loan difficult task, it’s not impossible. Plus, you’ll find that the cost of borrowing is much less with a bank, credit union, or online lender, no matter what your credit rating. How to apply for a car loan with bad credit Prepare on several aspects prior to beginning the process of applying for an auto loan for those with bad credit. Be particular about your credit score and be sure all terms are finalized prior to the purchase. 1. Know your credit score Before you begin shopping Check the credit scores of your customers. According to the FICO credit scoring system, which can range from 300-850 Any score lower than 580 is considered to be poor. The FICO score can be determined using factors such as how much you owe, the duration of your credit record and how often you pay. Not making your payments on time, consistently using more credit than you have available monthly credit, and having a poor credit history can all negatively impact your credit score. The Bankrate advice
Prior to applying to get an auto loan make sure you do not open new credit cards or loans. Be sure to do this prior to when you begin shopping will put you in a better situation with the lenders.
2. Make a savings account for a down payment If you have a less than stellar credit score, getting a car can increase the chances of getting approved for the auto loan. Setting aside some extra cash each month to pay for a down payment could also offset higher interest rates resulting from a less-than-stellar credit score and could lower your loan-to-value ratio, which can help you get better terms. Experts suggest a downpayment that is at least 20 percent, but if that’s too much, put down what you’re able to pay. It is possible that dealers who deal with credit-challenged customers will accept a down payment as low as $1,000. 3. Research 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 and the typical APRs for auto lenders. With an bad credit score, you’ll likely be offered some of the most expensive rates advertised. If you’re purchasing used it is also helpful to know the of your preferred car. 4. Start looking around. Once you’ve started your search do not limit yourself to one lender. There are a variety of lenders who can help you secure an loan that include: Banks as well as credit unions. If already have a relationship with a bank or credit union, you can start by looking here. Some credit unions and banks offer discounted rates for members. Online lenders: Many online lenders provide a prequalification tool on their websites, which lets you know what terms you might be eligible for prior to applying. This could save you from the hassle of a credit check if you don’t meet the standards. Dealerships for cars: You may qualify be approved if you have the required financial and credit requirements. You’ll talk to an official from the finance department and they’ll forward your information to several lenders. Some dealers may also have programs for people with bad credit history. However, they typically mark up rates they offer in order to earn more money on the deal. Pay-here and buy-here dealers: Buy-here, pay-here dealerships are a good option if you’re not accepted by banks or lender for the loan however, be careful. Although these dealers are most likely to grant approval to an applicant with , the interest rates can be much higher. Bankrate tip
Lenders run an examination of your credit during the application process. It’s wise to consider at least three different lenders in a 14-day period to ensure that your credit score doesn’t be hit by multiple slaps.
5. Prequalify with lenders. Prequalification allows you to determine whether you’re eligible to receive an loan before you apply and see the estimated loan terms. Plus, you’ll save time in applications and avoid unnecessary hard credit checks that can negatively impact your credit score. After you’ve been prequalified by several lenders, you’ll be able to submit documents and be approved. This will result in a strict credit report, however the loan is more important because it represents the lender’s commitment to provide an automobile loan for you. You’ll also have leverage when walking into the dealership and can negotiate like the cash buyer. 6. Make sure that the terms are final. Avoid subprime lending Subprime lenders could appear to be a safe option for anyone who is trying to obtain a car loan even with bad credit. These lenders usually cater to those with less credit scores and can make the process of buying a car seem effortless and easyinitially. However, they can also come with high rates of interest and could mean the payment of thousands of dollars in interest over the duration of the loan. Tips for banks
Do not consider subprime lenders in the event that you do not have another option for financing.
7. Shop loan terms, not monthly payments Lower monthly payments appear attractive on paper and are typically used to lure buyers. They can result in having to pay more money for the vehicle over the life of the loan because they . Because the car loans are available for bad credit have higher APRs they could result in paying thousands more than the car’s worth by the expiration of the loan due to the accumulation of interest. When you shop to purchase a car, search for the most favorable terms , which is usually with the lowest interest rate over the shortest period. That way, you will have more manageable monthly payments with fair interest rates. If you cannot find a rate that is low, consider shopping for an alternative vehicle. 8. Bring a friend with you Consider a co-signer Ask a friend or a relative to accompany you, says Massachusetts-based consumer lawyer Yvonne Rosmarin. A trusted friend or relative at the negotiating table can help inspire confidence. A sense of confidence, when paired with knowledge, can lead to more favorable loan conditions. Consider asking a trusted friend or family member to be a . Ideally, the person has a steady sources of earnings, high credit score, and an outstanding credit history. Co-signers lower the risk for lenders -since the co-signer will be responsible for the loan should you fail to make your repayments. Co-signing with a co-signer could be the result of a lower interest rate. 9. Watch out for add-ons or frauds. Nonprime buyers are more likely to come across loans that do not include essential items and services, says Josh Frank, former senior researcher at the Center for Responsible Lending. Other costs, such as , can pile up for those who aren’t prime buyers. Don’t sign a loan that’s contingent on additional warranties, for example, extended warranties, aftermarket services or . Pay attention to these additional charges particularly if you have to make an application at a buy-here, pay-here dealership or you plan to trade in your vehicle. Be aware that incorporating these costs into the loan is a way to pay more interest over the loan term. 10. Be sure the terms are final If you purchase a loan via a dealer always be sure that the terms are final before you sign. If you don’t, you could have to pay more for your monthly payments. Some dealers who are shady tell buyers that financing isn’t fully completed until after the buyer completes the purchase. They then inform the buyer that they have to accept an interest rate that is higher or return the car. This is known as . Where can you locate a bad credit car loan Car loans are available from most financial institutions, including credit unions, and online lenders. There is also dealership financing, as mentioned above. However, if you’ve got bad credit, you’re more likely to be able to secure a loan that has reasonable terms with an internet lender. Certain credit unions may approve you for a bad credit car loan if you have a positive history with their organization. Check out Bankrate’s picks for the best to explore options. Cars with bad credit loan APRs Borrowers who have excellent or good credit scores get the most attractive auto loan deals. This doesn’t mean that you’ll have fewer options if you have a credit score lower. However, your borrowing costs are likely to be more expensive because of the risk you take on the lender. Here’s a breakdown of the most current average interest rates based on credit rating from for the fourth quarter of 2022 The credit score range
New car
Cars used
Deep Subprime: 300 to 500
13.42%
20.62%
Subprime: 501 to 600
10.79%
17.46%
Near Prime: 601 to 600
8.12%
12.08%
Prime: 661 to 780
5.82%
7.83%
Super Prime 781 to 850
4.75%
5.99%
Next steps If you are a person with bad credit, it may be tougher for you to obtain a car loan. You could face less favorable terms or even predatory lending practices. However, researching, saving to pay for a down payment, and getting preapproved can help in getting the best price on an auto loan. If you that’s right for you, you should make prompt payments to improve the credit rating. At that point, ; you may be eligible for an loan with more favorable conditions. Learn more
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Written by student loans reporter Hanneh Bareham specializes in everything related to personal and student loans and can assist you in financing your next endeavor. She aims to help others reach their collegiate and financial goals through making loans simpler to comprehend. Written by Rhys Subitch Edited by Auto loans editor Rhys has written and edited for Bankrate since late 2021. They are passionate about helping readers gain confidence to control their finances through providing precise, well-researched and thorough information that break down complex topics into digestible chunks.
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