5 Steps To Get a Car Loan With Bad Credit
10 MIN READ
Published January 11, 2024 | Updated January 30, 2024
Car loans for bad credit work like regular auto loans, but they are often harder to get approved for, and if you are approved, they usually come with a much higher interest rate than traditional auto loans. Not all lenders provide these loans, so it's important to look for alternative or online lenders that specialize in working with those with poor or thin credit histories.
Before you take on any car debt, it's important to take steps to minimize your costs, such as saving up for a larger down payment, implementing steps to improve your credit score, and comparing different lenders.
Can You Get a Car Loan With Bad Credit?
It is possible to get a car loan with bad credit, but you’ll want to carefully consider the costs. The financing terms for subprime borrowers are expensive. The lower your credit score, the higher the potential risk for the lender, so they’ll charge a higher interest rate to compensate them for taking this higher level of financial risk.
The average interest rate for a new car for “prime” borrowers (with a credit score of 661 to 780) was 6.88% in Q3 2023. For “subprime” borrowers (with a credit score of 501 to 600), the average interest rate was 11.86%.
“Even with a FICO score of 550 or less, it may be possible to find a lender who will approve you for an auto loan,” says Brad Reichert, financial expert and founder and managing director of Reichert Asset Management LLC. “If you can prove your income is sufficient and stable, or if you’re able to put at least a 30% down payment on the car, you can increase your chances of being approved for a loan,” says Reichert.
Steps To Get an Auto Loan With Bad Credit
If you’re wondering how to buy a car with bad credit, the process is much like any other type of car loan. You’ll need a 600-650 credit score or better for a car loan with most lenders. If you have less-than-perfect credit or simply bad credit, follow these steps to improve your chances of approval on a loan to purchase a new car or to get a new loan to refinance an existing car loan.
1. Improve Your Credit Score
Check your credit score to see if you might pre-qualify for a car loan with bad credit. If you can wait, it’s always a good idea to try to improve your credit score before filling out a loan application. Consider implementing the following tips.
Pay Bills on Time
One of the easiest and most effective ways of improving your credit score is by paying all your bills on time and by making them in the proper amount(s). On-time payments after a bout of bad credit can help you re-establish a positive payment history. Lenders will view this positively when reviewing your application for any car loan with bad credit.
If you have a lot of unsecured credit cards or personal loan debt, consider paying it off or paying it down as much as possible before you apply for a new loan. This will improve your credit utilization ratio and help improve your credit score. Make a list of all your debts and prioritize them in order of their interest rate.
Another idea is to get a debt consolidation loan to combine multiple unsecured debts into one to pay off your debts faster.
Dispute Errors on Your Credit Report
Review your credit report from all three of the major credit bureaus (Experian, TransUnion, and Equifax) periodically. This will allow you to spot any inaccuracies and errors and then dispute the ones that may be negatively impacting your credit scores unfairly. Once these items are removed, your credit score should improve.
2. Save for a Down Payment
When applying for a car loan with bad credit, we recommend saving up for a larger down payment to save on the number of dollars in high-rate interest you’ll pay over the long term. You can also trade in your existing car to reduce the amount you need to borrow.
This will improve your chances of getting approved because lenders will like that you have a higher percentage of equity in the vehicle and will also lower your loan amount, which will lower your car loan payments.
A larger down payment will make you a competitive car buyer. Be sure to put your savings in a high-yield savings account that allows you to earn more interest on your money and make the most of it while you’re saving for your car purchase.
3. Know Your Budget Limits
Consider making a budget before you apply for a new car loan to see how much you can afford to pay each month. Other than your loan installment payments, you’ll have added expenses, such as fuel, repairs, maintenance, and insurance premiums–all of which combined can easily meet or exceed the monthly cost of your loan payments these days.
Your budget should also allow you to take care of your other financial obligations while making car payments. A longer repayment term can reduce your loan payments, but you’ll also pay more in total interest charges over the life of the loan as well.
4. Consider a Co-Signer
You can also improve your chances of getting approved for a car loan with bad credit if you apply with a cosigner. A cosigner applies for the loan with you and will also be responsible for payments if you fail to repay the loan.
To the lender, your co-signer is the legal “backup person” responsible for making payments on the auto loan for you if you are unable to do so. If you can’t make payments, your lender will hold your co-signer accountable for the loan in the same way that you are.
Find a cosigner with a good credit history and verifiable income to improve your chances of getting the loan. This may also help you get a lower interest rate as well because the lender will have two people to go to for payment instead of just one.
5. Research Lenders and Interest Rates
Learn more about lenders that typically offer car loans for bad credit and the interest rates they offer. Use a loan calculator to determine your monthly payments so you can choose the right option. There are several types of financial institutions to choose from, as we’ve listed below.
Your Bank or Credit Union
Your local credit union or bank may offer auto loans for borrowers with different credit profiles. Capital One is one such lender that specializes in car loans, even for those with bad credit.
If you’re a member of a credit union, such as Navy Federal Credit Union, they may even be able to overlook your credit history when evaluating your application for a loan if your income and assets are sufficient to support your payments.
Online lenders also typically offer car loans to borrowers with poor credit. In most cases, you’ll also be able to get a pre-approval for an auto loan so you can know the interest rate you qualify for before you sign the agreement.
Be sure to research and compare your options to ensure the lender you plan to work with is offering a fair deal and is reputable.
Car dealerships work with several different lenders and can help you get a loan that suits your needs and credit profile. Once you apply, you can get several options to choose from, as the dealership’s Finance Department will likely have relationships with up to a dozen different lenders and may have special loan terms available from lenders they frequently do business with.
If you do your research ahead of time and ask questions about your potential options, this can be a good way to find an auto loan with the best possible terms for your situation and the car you want to purchase.
However, unless you go in prepared to negotiate, you should know that this option may be a little more expensive since dealerships often add a margin (in the form of a 1%-2% increase) to the interest rate you eventually pay in return for providing you with this service.
Buy-Here, Pay-Here dealerships
Buy-here pay-here (BHPH) dealerships work primarily with borrowers with poor or no credit. Instead of getting a car loan from a financial institution, these dealerships finance the vehicles themselves with their own capital.
While it's usually easier to qualify for these loans, you can expect to pay higher interest rates than just about anywhere else. The down payment requirements may also be higher.
3 Best Car Loans for Bad Credit
To help you find the best possible car loans for bad credit, we examined 20 lenders that cater to borrowers with poor credit. We selected our top three bad credit car loan lenders based on the loan amounts they offer, starting APRs, loan terms, and ease of application process.
Loan Amounts: $7,500 to $100,000
Terms: 36 to 84 months
Starting APR: 7.90%
Loan Amounts: Minimum $1,000
Terms: 36 to 78 months
Starting APR: 6.85%
Loan Amounts: NA
Terms: Up to 72 months
Starting APR: 7.90%
The Bottom Line on Getting a Car Loan With Bad Credit
Even if you have less-than-perfect credit, it's possible to get a car loan, though it may be expensive. You can ease some of the burden of higher loan rates by improving your credit, saving up a larger down payment, and comparing your loan offers.
Consider your budget carefully and buy a reliable used car if possible so you can reduce the amount you need to borrow. Consider prequalification to compare your loan options. Make timely payments and use autopay to improve your credit so you can refinance the loan for a competitive interest rate later.