How to get a car loan with bad credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by offering interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this website, for example for instance, the order in which they may appear within the listing categories, except where prohibited by law. Our mortgage or home equity products, as well as other home lending products. However, this compensation will have no impact on the information we publish, or the reviews appear on this website. We do not cover the universe of companies or financial offerings that could be open to you. Anna Kraynova/Getty Images
6 minutes read Read Published March 02, 2023.
The writer is Hanneh Bareham Written by Student loans reporter Hanneh Bareham is an expert in all matters that is related to student and personal loans and helping you fund your next venture. She is determined to assist others reach their collegiate and financial goals by making loans easier to understand. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has written and edited for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to control their finances with concise, well-studied information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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If you have questions about money. Bankrate has answers. Our experts have been helping you manage your finances for more than four years. We strive to continuously give our customers the right advice and tools needed to succeed throughout life’s financial journey. Bankrate adheres to strict standards , so you can trust that our content is honest and reliable. Our award-winning editors, reporters and editors create honest and accurate information to assist you in making the right financial decisions. The content we create by our editorial staff is objective, truthful and uninfluenced by our advertisers. We’re honest about the ways 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 when you click on certain hyperlinks on our site. So, this compensation can affect the way, location and in what order products are listed, except where prohibited by law for our mortgage or home equity products, as well as other home loan products. Other factors, such as our own proprietary website rules and whether the product is available in your region or within your personal credit score could also affect the manner in which products appear on this site. Although we try to offer a wide range offers, Bankrate does not include details about every financial or credit products or services. If you have a poor credit score, you might be concerned that you might not get approved for a car loan from a traditional lender. Before you decide to take out a loan through a buy-here-pay-here dealer, consider researching all your alternatives. While being a victim of bad credit — a credit score that is between 300-500 could make getting a loan more challenging, it isn’t difficult. Plus, you’ll find that the costs of borrowing are less with a bank, credit union or online lender, no matter what your credit rating. The steps to obtain an auto loan with bad credit Prepare on several aspects prior to beginning the application process for an auto loan with bad credit. Be particular about your credit score, and make certain that the terms are all in place before the purchase goes through. 1. Know your credit score Before you start shopping make sure you check your credit score. According to the FICO credit scoring system, which is ranging from 300 to 850, any score that falls less than 580 is considered as poor. Your FICO score is calculated based on things like the amount you owe and the duration of your credit history as well as your payment history. Not making your payments on time, regularly using more credit than you have available monthly credit, and having a poor credit history all can affect your credit score. The Bankrate advice
Before you apply to get an auto loan make sure you do not open the credit cards of your new loans. Be sure to do this prior to when you begin shopping can put you in a more favorable standing with lenders.
2. Make a savings account for a down payment If you have a less than stellar credit score, an automobile can boost the chances of getting approved for an automobile loan. Setting aside some extra cash every month for a downpayment can help offset the higher interest rates resulting from a less-than-stellar credit score and could lower your loan-to-value ratio, allowing you to get better conditions. Experts recommend a down payment that is at least 20 percent however if that’s just too much, just put down what you can afford. It is possible that dealers who deal with credit-challenged customers will accept as little as $1,000. 3. Research Prepare as much as you can so that you don’t get caught off guard when it’s time to bargain. When you’re applying for a loan be aware of the typical APRs for auto lenders. If you have the bad credit score, you’ll likely be offered some of the highest advertised rates. If you’re purchasing used, it also helps to be aware of the condition of your preferred car. 4. Explore the options once you have started your search do not limit yourself to a single lender. There are a variety of lenders that can assist you to secure a loan for your business, such as banks and credit unions: If already have a relationship with a bank or credit union, you can start here. Some banks and credit unions offer discounted rates for members. Online lenders: A lot of online lenders offer an application tool for prequalification on their sites, which allows you to determine what terms you might be eligible for prior to submitting an application. This could save you from an expensive credit test if you don’t meet the criteria. Car dealerships: You are eligible be approved if you have the required financial and credit guidelines. You’ll have a meeting with a finance department representative, and they’ll forward your details to various lenders. Some dealers may also offer programs for borrowers with a bad credit history. But, dealers frequently mark up the rates they offer in order to earn more money off the deal. Buy-here, pay-here dealerships are a good option. Pay-here or Buy-here dealerships are a good option if you aren’t an approval from banks or lender for an loan however, be careful. While these types of dealerships are better able to accept a person with this type of loan, the interest rates are often much higher. Bankrate tip
Lenders run an extensive credit test when you apply. It’s wise to consider at least three different lenders within a 14-day timeframe so your credit score doesn’t be hit by multiple slaps.
5. Prequalify with lenders Prequalification allows you to see if you’re eligible for a loan before you apply and view estimates of loan terms. Plus, you’ll save time in applications and avoid the needless credit checks, which can adversely affect the credit rating. When you’re prequalified with several lenders, you’ll need to provide documents and be approved. This will lead to a formal credit assessment, but the loan holds more weight as it represents the lender’s commitment to provide an automobile loan for you. Also, you’ll be able to leverage yourself when you enter the dealership, and you can negotiate as cash buyers. 6. Be sure the terms are in writing 6. Avoid subprime lenders Subprime lenders can appear to be a safe choice for those who are trying to secure a car loan that has bad credit. They usually target customers with lower credit scores and make the process of buying a car seem easy and stress-free — at first. But they may come with astronomically high interest rates and can mean the payment of thousands of dollars to pay interest throughout the course of the loan. Bankrate tip
Consider subprime lenders only in the event that you do not have another option for financing.
7. Shop loan terms, not monthly payments Lower monthly payments look attractive on paper, and are often utilized to attract buyers. They can result in paying more for your car over the course of the loan since they . Because car loans specifically designed for bad credit have higher APRs and you could end up paying thousands more than your vehicle’s value at the expiration of the loan because of interest accumulation. When you’re shopping for a loan, you should look for the best conditions — typically with the lowest interest rate over the shortest amount of time. This way, you’ll have a more manageable monthly payment with reasonable interest rates. If you cannot find a low APR look into buying an alternative vehicle. 8. Take a friend along and think about a co-signer Ask a friend or a relative to accompany you, says Massachusetts-based consumer lawyer Yvonne Rosmarin. Bring someone you trust to the negotiation table can create confidence. And confidence, combined with knowledge, could lead to more favorable loan conditions. You might consider asking a person in your family or friend to become a . Ideally, this individual should have a steady earnings source, strong credit score, and an outstanding credit history. Co-signers decrease a lot of the risk that lenders faceas the co-signer is accountable for the loan should you default on your repayments. Adding a co-signer can be a and usually results in an interest rate that is lower. 9. Beware of add-ons and scams Nonprime buyers are more likely to encounter loans that do not include essential goods and services, says Josh Frank, former senior researcher at the Center for Responsible Lending. Other expenses, like , can pile up for nonprime buyers. Never agree to an loan which is contingent on , such as extended warranties, aftermarket services or . Take note of such additional charges, especially if you need to apply at a buy-here, pay-here dealership or you plan to trade in your vehicle. Also, remember that incorporating these costs into the loan is a way to pay more interest during the loan term. 10. Be sure the terms are final If you purchase a loan with a broker, make sure to make sure the terms are in place prior to signing. If you don’t, you could be charged more monthly. Some shady dealers tell car buyers their financing is not completed until the buyer has completed the purchase and they must accept the higher rate of interest or return the car. This is known as . Where can you locate the bad credit car loan Car loans are available from most bank, credit unions and online lenders. You can also use dealership financing, as mentioned above. However, if you’ve got bad credit, you’re more likely to obtain a loan with acceptable terms from an online lender. Some credit unions will also approve you for an bad credit car loan if you have a good track record with their institution. Find out which Bankrate’s choices are the best to explore options. Bad credit car loan APRs Borrowers with good or excellent credit score get the most affordable auto loan deals. However, that doesn’t mean you’ll be denied loans if the credit rating is lower. But, the cost of borrowing are likely to be higher because of the risk you pose to the lender. Here’s a breakdown of current average interest rates by credit score for the fourth quarter of 2022: Credit score range
New car
Cars used
Deep Subprime: 300 to 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 predatory lending practices. It’s good to know that researching, saving to pay for a down payment, and getting preapproved help in negotiating the best deal in an auto loan. If this is the loan for you, you should make prompt payments to improve your credit score. Then, you might find a loan with even better 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 aims to help people achieve their collegiate and financial goals through making loans simpler to comprehend. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing precise, well-researched and thorough information that breaks down otherwise complex subjects into bite-sized pieces.
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