If you have a low credit score you may be worried that you won’t get approved for a car loan from a traditional lender. But before settling for a loan through a buy-here-pay-here dealer, consider researching all your options.
Although having bad credit can make getting a car loan a bit more challenging, it isn’t impossible. Plus, you’ll find that borrowing costs are far lower with a traditional lender, regardless of your credit score.
Steps to get a car loan with bad credit
Prepare on several fronts before you start the process of applying for an auto loan with bad credit. Pay special attention to your credit score and be sure all terms are finalized before the purchase goes through.
1. Know your credit score
Before you begin the shopping process, check your credit score. According to the FICO credit scoring system, which ranges from 300 to 850, any score that falls below 580 is considered poor.
Your FICO score consists of a few categories, like how much you owe, the length of your credit history and your payment history. Not making your payments on time, consistently spending more than your available monthly credit and having a short credit history can all negatively impact your credit score.
Before applying for an auto loan, avoid opening new credit cards or loans. Making efforts to repair your credit score before you begin shopping will put you in a more favorable position with lenders.
2. Save for a down payment
If you have a lower credit score, making a down payment on a car can increase your chances of securing and getting approved for an auto loan.
Setting aside some extra cash each month for a down payment can also offset higher interest rates caused by a less-than-stellar credit score and can lower your loan-to-value ratio, helping you qualify for better terms.
Prepare as much as possible so you’re not caught off guard when the time comes to negotiate. Before you apply for a loan, know exactly what monthly loan payment you can afford and what APRs are common among auto lenders. With a bad credit score, you’ll likely be offered some of the highest advertised rates.
If you’re buying used, it also helps to know the Kelley Blue Book value of your preferred car.
4. Shop around
Once you begin the shopping process, don’t limit yourself to just one lender. There are a variety of lenders that can help you secure a loan, including:
- Banks and credit unions: If you already have a relationship with a bank or credit union, start here. Some banks and credit unions offer discounted rates for members.
- Online lenders: Many online lenders offer a prequalification tool on their websites, which allows you to see what terms you might be eligible for before applying. This can save you a hard credit check if you don’t meet the requirements.
- Car dealerships: You can finance your car through a dealership if you meet the financial and credit criteria. You’ll meet with a representative of the finance department, and they will send your information to different lenders. Some dealerships may also offer programs for borrowers with a bad credit history.
- Buy-here, pay-here dealerships: Buy-here, pay-here dealerships can be useful if you don’t get approved by a bank or lender for a loan, but they should be approached with caution. While these types of dealerships may be more likely to approve someone with bad credit for a loan, the interest rates can be much higher.
Lenders run a hard credit check during the application process. It’s wise to consider at least three different lenders in a 14-day period so your credit score doesn’t take multiple hits.
5. Prequalify with lenders
Prequalification allows you to see if you’re eligible for a loan before you apply. With prequalification, you’ll save time in applications and avoid unnecessary hard credit checks.
Multiple hard credit checks have a negative impact on your credit score, and if you already have less-than-desirable credit, it’s always worth prequalifying with a few lenders. With a preapproved auto loan, you’ll also have leverage when walking into the dealership, and can negotiate like a cash buyer.
6. Be sure the terms are final
If you finance through a dealer, always make sure the terms are final before you sign. If you don’t, you may face higher monthly payments.
This is known as a yo-yo financing: Dealers tell car buyers their financing is not complete well after the customer finalizes the purchase, and they must accept a higher interest rate or return the car.
7. Avoid subprime lenders
Subprime lenders can seem like a sure bet to anyone wondering how to get a car loan with bad credit. These lenders usually cater to customers with lower credit scores and can make the car buying process seem easy and stress free — at first. But subprime car loans can come with sky-high interest rates and can mean paying thousands of dollars extra in interest over the life of the loan.
Only consider subprime lenders if you are unable to find another financing option.
8. Shop loan terms, not monthly payments
Lower monthly payments look good on paper and are usually used to entice buyers. They may lead to you paying more for your car over the life of the loan, since they come with longer terms. Because car loans for bad credit have higher APRs, you may end up paying thousands more than the car’s full value by the end of the loan because of interest accumulation.
When you’re shopping, look for the most favorable terms — usually the lowest APR over the shortest period. That way, you will have more manageable monthly payments with reasonable interest rates. If you’re unable to find a low APR, you may want to consider shopping for a different vehicle.
9. Bring a friend with you — and consider a co-signer
Ask a friend or a relative to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the negotiating table can help inspire confidence. And confidence, combined with knowledge, can lead to more favorable loan terms.
If this is someone that you really trust, consider asking them to be a co-signer. Co-signers reduce much of the risk for lenders — they become responsible for the loan should you default on your payments. Adding a co-signer can be a strong negotiating tool and usually results in a lower interest rate.
10. Look out for add-ons and scams
Nonprime buyers are more likely to encounter lending contracts with nonessential goods and services, says Josh Frank, former senior researcher for the Center for Responsible Lending. Other costs, such as car insurance rates, can pile up for nonprime buyers.
Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even car insurance. Be aware of these add-ons, especially if you need to apply at a buy-here, pay-here dealership or you’re planning on trading in your vehicle.
Where to find a bad credit car loan
Car loans are available through most banks, credit unions and online lenders. You can also use dealership financing, as discussed above. But if you have bad credit, you’re more likely to get a loan with reasonable terms through an online lender.
Online lenders to consider that work with borrowers of all credit levels include:
- Autopay: ideal if you’d prefer to explore offers from multiple lenders, and rates start at 1.99 percent.
- iLending: caters to borrowers who want to refinance their existing loan, and rates also start at 1.99 percent.
- Carvana: offers a seamless online experience with rates starting at 3.9 percent.
Capital One is another popular choice for consumers with less than perfect credit, and the entire lending process can be handled online if you don’t live near a branch. Some credit unions will also approve you for a bad credit car loan if you have a good history with their institution.
Bad credit car loan APRs
The most competitive auto loan offers are generally reserved for borrowers with good or excellent credit. Still, that doesn’t mean you’ll automatically have fewer options if your credit score is on the lower end.
Your borrowing costs will likely be much higher as a result of the risk you pose to the lender. Here’s a breakdown of the current average interest rates by credit rating from Experian’s 2022 Q1 automotive financing study:
|Credit score range||New car||Used car|
|300 to 500||14.76%||20.99%|
|501 to 600||10.87%||17.29%|
|601 to 660||6.70%||10.48%|
|661 to 780||3.56%||5.58%|
|781 to 850||2.40%||3.71%|
Unfortunately, if you have bad credit, it may be tougher for you to get a car loan. You may face less favorable terms or even predatory lending practices.
The good news is that coming to the negotiating table with preparation and research can help you find a loan at a much lower rate. First, find the loan that’s right for you and pay it down consistently to help boost your credit score. At that point, consider refinancing; you might find a loan with even better terms.