How to get a car loan with bad credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make smarter financial decisions by providing you with financial calculators and interactive tools that provide objective and original content, by enabling you to conduct research and compare information for free to help you make sound financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies who pay us. This compensation could affect how and when products are featured on this site, including such things as the order in which they may be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other home loan products. This compensation, however, does not influence the information we provide, or the reviews you see on this site. We do not cover the entire universe of businesses or financial offerings that could be open to you. Anna Kraynova/Getty Images
6 minutes read Read Published March 02, 2023.
written by Hanneh Bareham Written by Student loans reporter Hanneh Bareham is a specialist in all things related to personal and student loans and can help you finance your next project. She strives to help students achieve their college and financial goals by making loans simpler to comprehend. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has written and edited for Bankrate from late 2021. They are committed to helping readers gain the confidence to take control of their finances by providing concise, well-studied information that breaks down complex issues into digestible chunks. The Bankrate promises
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If you have questions about money. Bankrate has the answers. Our experts have been helping you manage your finances for more than four decades. We strive to continuously give our customers the right advice and tools required to succeed throughout life’s financial journey. Bankrate adheres to a strict code of conduct , so you can trust that our content is honest and precise. Our award-winning editors and journalists produce honest and reliable content that will help you make the right financial decisions. The content created by our editorial team is factual, objective and is not influenced through our sponsors. We’re transparent about how we are capable of bringing high-quality content, competitive rates and helpful tools to you by explaining how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the promotion of sponsored goods and, services, or by you clicking on certain hyperlinks on our site. Therefore, this compensation may influence the manner, place and when products are displayed within the categories of listing, except where prohibited by law. This is the case for our mortgage home equity, mortgage and other products for home loans. Other factors, such as our own website rules and whether the product is available in your area or at your own personal credit score can also impact the way and place products are listed on this website. While we strive to provide an array of offers, Bankrate does not include details about every financial or credit products or services. If you have a poor credit score you may be concerned about whether you will be able to get a car loan from a traditional lender. However, before you take out a loan through a buy-here-pay-here dealer take a look at all of your alternatives. While being a victim of bad credit — a credit score between 300 and 500 can make getting a difficult task, it’s not difficult. Additionally, you’ll notice that borrowing costs are far lower with a bank, credit union or online lender, whatever your credit scores. Steps to get an auto loan that are based on bad credit Prepare on several fronts before you start the application process to get an automobile loan with bad credit. Take note of your credit score and be sure all terms are finalized before the purchase goes through. 1. Know your credit score Before you start shopping Check the credit scores of your customers. According to the FICO credit scoring system that ranges from 300 to 850, any score that falls lower than 580 is considered to be poor. Your FICO score is calculated on the basis of factors such as how much you owe as well as the duration of your credit history and how often you pay. Not making your payments punctually, overspending your monthly credit, and having a short credit history could all negatively impact the score of your credit. Tips from Bankrate
Before applying to get an auto loan make sure you do not open any new credit card or loans. Be sure to do this prior to when you begin shopping will put you in a favorable situation with lenders.
2. Save for a down payment If you’re not able to pay a down payment credit score, the road, a car could increase your odds of getting approved for an automobile loan. Setting aside some extra cash every month for a down payment can be a good way to offset more expensive interest rates due to poor credit scores and can lower your loan-to-value ratio, allowing you to qualify for better rates. Experts suggest a downpayment of at least 20 percent, but if that’s too much, you can pay what you are able to afford. It is possible that dealers that work with credit-challenged customers will accept down payments as low as $1,000. 3. Research Prepare as much as possible so you’re not in a rush when it’s time to bargain. When you’re applying for a loan be aware of the typical APRs for auto lenders. With the bad credit score, you’ll likely be offered some of the most expensive rates advertised. If you’re buying used it’s also beneficial to be aware of the condition of the vehicle you’re considering. 4. Explore the options once you have started the process of shopping, don’t limit yourself to just one lender. There are many lenders who can help you get a loan, including: Banks or credit unions you already have a relationship with a bank or credit union start by looking here. Certain credit unions and banks offer discounted rates for members. Online lenders: Many online lenders have a prequalification tool on their sites, which allows you to determine the conditions you could be eligible for before applying. This will save you from having the hassle of a credit check if you don’t meet the requirements. Car dealerships: You can apply for credit if you have the required financial and credit criteria. You’ll talk to a finance department representative, and they’ll send your details to various lenders. Some dealerships may offer loans to those with bad credit history. However, they typically mark up rates they offer in order to earn more money off the deal. Dealerships that buy-here or pay-here are a good option. Pay-here or Buy-here dealerships are useful when you don’t get an approval from an institution or lender for a loan however, you should be wary. While these dealerships may be better able to accept a person with this type of loan, the interest rates can be much higher. Bankrate tip
The lender will conduct an extensive credit test when you apply. It’s advisable to think about at least three different lenders in a 14-day period to ensure your credit score won’t be hit by multiple slaps.
5. Prequalify with lenders through Prequalification allows you to see whether you’re eligible to receive an loan prior to submitting an application and see the estimated loan terms. Additionally, you’ll be able to save time on applications and avoid the needless credit checks, which can adversely affect your score on credit. After you’ve been prequalified by some lenders, you’ll need to provide documentation and get preapproved. It’ll result in a hard credit report, however the loan is more important because it demonstrates the lender’s willingness to extend the auto loan towards you. Additionally, you’ll have leverage when you enter the dealership, and you can negotiate as the cash buyer. 6. Make sure that the terms are final. Avoid subprime lenders Subprime lenders may seem like a good choice for those who are trying to obtain a car loan with bad credit. They usually target customers with lower credit scores and can make the car buying process appear easy and effortlessinitially. But they may come with astronomically high rates of interest and could mean paying thousands of dollars extra in interest over the life of the loan. Bankrate tip
Only consider subprime lenders if you cannot find another financing option.
7. The terms of the shop loan terms, not monthly payments Lower monthly payments look attractive on paper, and are often used to lure buyers. They could result in you spending more on your car throughout the duration of the loan due to the fact that they . Since car loans for bad credit have higher APRs and you could end up paying more than the car’s worth by the expiration of the loan because of interest accumulation. When shopping for a car for a loan, you should look for the most attractive conditions — typically that have the lowest rate for the shortest time. This way, you’ll be able to make more affordable monthly payments with fair interest rates. If you are unable to locate a lower APR you can consider looking for a different vehicle. 8. Bring a companion along and think about a co-signer Ask someone you know or a family member to go with you, suggests Massachusetts-based consumer attorney Yvonne Rosmarin. A trusted friend or relative at the table to negotiate can create confidence. A sense of confidence, when paired with knowledge, can result in more favorable loan terms. You might consider asking a relative or partner to serve as a . Ideally, this individual has a steady sources of earnings, strong credit score, and a stellar credit history. Co-signers reduce much of the risk for lenders -as the co-signer is responsible for the loan should you default on your repayments. Co-signing with a co-signer could be an advantage and typically results in a lower interest rate. 9. Look out for add-ons and scams . Buyers who are not prime are more likely to come across loan contracts that don’t include any essential goods and services, says Josh Frank, former senior researcher at the Center for Responsible Lending. Other costs, including , can pile up for those who aren’t prime buyers. Never agree to a loan which is contingent on , such as extended warranties, aftermarket services or . Be aware of these extras particularly if you have to apply at an auto dealer that offers buy-here or pay-here or you plan to trade in your vehicle. Be aware that incorporating these charges into the loan will mean you’ll have to be paying more interest over the loan time. 10. Make sure that the terms are in place if you finance via a dealer you must ensure the terms are final before signing. If you don’t, you may have to pay more for your monthly payments. Some shady dealers tell car buyers that financing isn’t fully completed until after the buyer has completed the purchase and they must accept the higher rate of interest or sell the vehicle. This is known as . Where can you find a bad credit car loan Car loans are available through most bank, credit unions, and online lenders. There is also dealership financing, as discussed above. If you’re a person with bad credit, you’re more likely to obtain a loan with acceptable terms from an internet lender. Some credit unions will also approve you for an bad credit car loan if you have a solid history with their organization. Find out which Bankrate’s choices are the most suitable options to research. Credit-worthy car loan APRs Borrowers who have good or excellent credit get the best attractive auto loan offers. That doesn’t mean you’ll automatically have less options if your credit score is less. However, your costs for borrowing are likely to be more expensive due to the risk you pose to the lender. Here’s a breakdown of the current interest rates for the average credit score from the fourth quarter of 2022: Credit score range
New car
Car used
Deep Subprime 300-500 500
13.42%
20.62%
Subprime: 501-600
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 851
4.75%
5.99%
Next steps If you are in the process of establishing bad credit, it may be more difficult to secure an auto loan. You may face lower interest rates or lenders who are predatory. It’s good to know that conducting research, saving up to pay for a down payment, and getting preapproved will help you prepare to get the best deal in an auto loan. If this is the loan for you, make timely payments to improve your score on credit. In the future, you might find an loan with even more favorable conditions. Find out more
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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 venture. She hopes to assist others reach their collegiate and financial goals by making loans simpler to comprehend. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to take control of their finances by providing precise, well-researched and thorough information that break down complex topics into digestible chunks.
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