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 smarter financial decisions by offering financial calculators and tools that are interactive that provide objective and original content, by enabling users to conduct research and compare data for free and help you make informed financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site come from companies who pay us. This compensation can affect the way and where products appear on this site, including for instance, the order in which they appear within the listing categories, except where prohibited by law. Our mortgage or home equity products, as well as other products for home loans. But this compensation does have no impact on the content we publish or the reviews appear on this website. We do not include the vast array of companies or financial deals that might be accessible 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 a specialist in all things that is related to student and personal loans and helping you finance your next endeavor. She strives to help others reach their collegiate and financial goals by making loans easier to understand. 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 confidence to control their finances by providing concise, well-studied information that breaks down otherwise complex subjects into bite-sized pieces. The Bankrate guarantee
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There are money-related questions. Bankrate has answers. Our experts have been helping you master your money for over four years. We are constantly striving to give our customers the right guidance and the tools necessary to be successful throughout their financial journey. Bankrate adheres to a strict code of conduct standard of conduct, so you can rest assured that our content is truthful and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial choices. The content we create by our editorial team is factual, objective, and not influenced through our sponsors. 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 specific links on our site. So, this compensation can affect the way, location and in what order products are listed, except where prohibited by law. This is the case for our mortgage, home equity and other home lending products. Other factors, such as our own rules for our website and whether the product is available in your area or at your self-selected credit score range can also impact the manner in which products appear on this website. Although we try to offer an array of offers, Bankrate does not include specific information on each credit or financial product or service. If you have a poor credit score, you may be concerned that you might not be approved for a car loan from an established lender. But before settling for a loan via a buy-here, pay-here dealer think about researching all possible possibilities. Although having bad credit -- a credit score of between 300 and 500 may make getting a loan difficult task, it's not difficult. In addition, you'll discover that the cost of borrowing is much less with a bank, credit union, or online lender, regardless of your credit score. Steps to get an auto loan for those with bad credit Prepare on several aspects prior to beginning the process of applying for an auto loan that has 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 start shopping, check your score on credit. Based on the FICO credit scoring system, which ranges from 300 to 850 scores, any score lower than 580 is considered to be poor. The FICO score will be calculated based on factors such as how much you owe, the length of credit histories, and how often you pay. Not making your payments punctually, spending more than your available monthly credit and having a bad credit history all can affect the score of your credit. Tips from Bankrate
When making an application for an auto loan be sure to avoid opening any new credit card or loans. Be sure to do this prior to when you start shopping puts you in a favorable situation with the lenders.
2. Set aside money for a downpayment If you have a lower credit score, getting a car can increase your chances of securing and getting granted the auto loan. Making a small amount of cash each month to pay for a down payment could be a good way to offset higher interest rates caused by a less-than-stellar credit score and could lower your loan-to-value ratio, helping you qualify for better terms. Experts suggest a downpayment of at least 20 percent however, if that's too much, pay what you can afford. There are dealers who deal with customers who are credit challenged will take as little as $1,000. 3. Research Prepare as much as you can so that you don't get surprised when the time comes to discuss the terms. When you're applying for a loan make sure you know what APRs are common among auto lenders. If you have the bad credit score, you'll probably be offered the highest advertised rates. If you're purchasing used, it also helps to understand the features of the car you want to purchase. 4. Explore the options once you have started the shopping process, don't limit yourself to just one lender. There are a variety of lenders who can help you secure a loan, including: Banks and credit unions: If you already have relationships with a financial institution or credit union, you can start here. Some banks and credit unions offer discounted rates for members. Online lenders: A lot of online lenders provide an application tool for prequalification on their websites. This lets you know what terms you might be eligible for prior to applying. This will save you from having a hard credit check in the event that you do not meet the criteria. Dealerships for cars: You may qualify if you satisfy the credit and financial requirements. You'll meet with a finance department representative, and they'll forward your information to different lenders. Some dealers may also offer programs for people with bad credit history. However, dealerships often mark up the rates they offer in order to earn more money off the deal. Pay-here and buy-here dealers: Buy-here, pay-here dealerships are useful when you aren't accepted by an institution or lender for an loan, but be cautious. While these dealerships may be more likely to approve someone with this type of loan, the interest rates can be much higher. Bankrate tip
Lenders run an examination of your credit during the application process. It is recommended to look at least three different lenders within a 14-day timeframe to ensure that your credit score doesn't suffer multiple blows.
5. Prequalify with lenders Prequalification lets you see whether you're qualified for an loan before you apply and see estimated loan terms. Plus, you'll save time in applications and avoid the needless credit checks that could adversely affect the credit rating. Once you're pre-qualified with a few lenders, you'll be able to submit documents and be approved. This will lead to a formal credit check, but an auto loan holds more weight as it represents the lender's commitment to extend an automobile loan for you. You'll also have leverage in the car dealership, and you can negotiate as the cash buyer. 6. Be sure the terms are final. Avoid subprime lenders Subprime lenders can seem like a sure option for anyone who is trying to secure a car loan even with bad credit. They typically cater to those with less credit scores, and they can make the car purchasing process seem easy and stress-free -initially. However, they can also come with high rates of interest, and can result in paying thousands of dollars extra to pay interest throughout the life of the loan. Tips for banks
Only consider subprime lenders if you cannot find an alternative financing source.
7. The terms of the shop loan terms do not include monthly payments. monthly payments look good on paper and are usually utilized to attract buyers. They can result in paying more for your car over the life of the loan due to the fact that they . Since cars with loans for bad credit have higher APRs, you may end up paying thousands more than the car's worth by the expiration of the loan because of interest accumulation. When you're shopping for a loan, you should look for the most favorable conditions -- typically the lowest APR over the shortest time. That way, you will have more manageable monthly payments with fair interest rates. If you can't find a low APR you can consider looking for another vehicle. 8. Bring a friend with you Consider co-signing with a friend or a relative to accompany you, suggests Massachusetts-based consumer attorney Yvonne Rosmarin. Bring someone you trust to the table to negotiate can inspire confidence. And confidence, combined with knowledge, may lead to more favorable loan conditions. Consider asking a trusted friend or family member to serve as a . Ideally, this individual must have a stable earnings source, good credit score and an exceptional credit history. Co-signers lower the risk that lenders face- because the co-signer is responsible for the loan should you default on your payments. The addition of a co-signer the result of a lower interest rate. 9. Watch out for add-ons or frauds. Nonprime buyers are more likely to encounter loan contracts that don't include any essential items and services, says Josh Frank, former senior researcher at the Center for Responsible Lending. Other costs, including that can add up for buyers who are not prime. Never agree to an loan that is contingent upon certain things, like extended warranties, aftermarket services or . Pay attention to these add-ons particularly if you have to apply at a pay-here, buy-here, or buy-here dealer or plan to trade in your vehicle. Also, remember that incorporating these charges into your loan means you'll pay more interest over the loan period. 10. Make sure that the terms are binding if you finance through a dealer, make sure to ensure the terms are final before you sign. If you don't do this, you could be charged more monthly. Some shady dealers tell car buyers their financing is not fully completed until after the buyer has completed the purchase and they have to accept an interest rate that is higher or even return the vehicle. This is known as . Where can you locate a bad credit car loan Car loans are available from most bank, credit unions and online lenders. There is also dealership financing, as mentioned above. If you're a person with bad credit, you're more likely to get a loan with reasonable terms through the internet lender. Certain credit unions will allow you to get a bad credit car loan if you have a good history with their organization. Check out Bankrate's picks for the best to explore options. Bad credit car loan APRs Borrowers who have good or excellent credit get the best attractive auto loan deals. However, that doesn't mean you'll have less options if your credit score is lower. But, the cost of borrowing are likely to be higher due to the risk you pose to the lender. Here's a breakdown on the most current average interest rates based on credit score from the fourth quarter of 2022 Credit score range
New car
Car 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 661-780
5.82%
7.83%
Super Prime 781 to 850
4.75%
5.99%
Next steps If you have bad credit, it may be more difficult to secure a car loan. There could be less favorable terms or even lenders who are predatory. However, doing your research, saving for a downpayment and getting preapproved can help in getting the most favorable rate in an auto loan. If it's the right choice for you, you should make prompt payments to improve your credit score. In the future, you could be able to get the 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 assist you in financing your next project. She aims to help students achieve their college and financial goals through making loans simpler to comprehend. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to control their finances with precise, well-researched and thorough information that break down complex topics into digestible chunks.
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