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What are the best car loans for bad credit?
We’ve selected the best auto loans for people with bad credit scores. If something’s damaged your credit (or if you’re just starting out and you don’t have much of a credit history yet), finding a decent auto loan can be hard, but we’ve listed some of your best options below.
Best Car Loans for Bad Credit
Best for Bad Credit Overall
Best for Used Car Purchases
Best for New Car Purchases
Best for Refinancing
Best for Instant Approval
Best Bad Credit Car Loans
| Loan | Best For | Loan Amount | Loan Term | Credit Score |
|---|---|---|---|---|
| Bad Credit Overall | $4,000–$75,000 | 36–72 months | 300–600 | |
| Used Car Purchases | $1,000–$85,000 | 36–72 months | 300–600 | |
| New Car Purchases | $5,000–$100,000 | 24–72 months | 525–660 | |
| Refinancing | $2,500–$100,000 | 24–84 months | 560–660 | |
| Instant Approval | $10,000–$80,000 | 36–72 months | 520–660 |
Can I get a car loan with a bad credit score?
Yes, you can buy a car with a bad credit score. This is because car loans are a type of secured loan, meaning they’re lower risk for lenders. Secured loans are backed by collateral that your lender can seize if you stop making payments. In the case of auto loans, the car itself is the collateral.
While there are bad-credit car loans out there, most come with much higher interest rates than car loans for people with good credit scores. As is the case with most other types of credit, auto financing costs more when you have poor credit. The same is true if you’re trying to get a car with no credit.
With that said, there’s no minimum credit score needed to buy a car. Different auto lenders have different standards, so there’s no universal consensus about what a good credit score is. However, FICO and VantageScore (the companies that produce the main scoring models used by lenders) categorize credit scores into the following ranges:
| FICO/VantageScore Rating | FICO Score Range | VantageScore Range |
|---|---|---|
| Exceptional/Excellent | 800–850 | 781–850 |
| Very Good/Good | 740–799 | 661–780 |
| Good/Fair | 670–739 | 601–660 |
| Fair/Poor | 580–669 | 500–600 |
| Poor/Very Poor | 300–579 | 300–499 |
If possible, it’s generally better to improve your credit score before taking out a new loan because the higher interest rates you’d get with a low credit score could cost you hundreds or even thousands of dollars more over the life of the loan.
However, if you do take out a car loan with a bad credit score, make sure you can afford the monthly payments. If you fail to repay the loan as agreed, you risk repossession, where your auto lender takes back ownership of your vehicle. A legitimate repossession will cause even more harm to your already-damaged credit. It’ll also nearly be impossible to remove from your credit report and will stay on it for seven years.
Alternatives to a bad-credit car loan
If you’d rather not take on the added risk and expenses that come with taking out an auto loan while your credit is poor, then you might consider some of these alternatives:
- Pay cash upfront for a used car: This is a good way of ensuring that you keep within your budget. However, make sure to have the car inspected first so that you don’t end up facing hefty mechanic bills.
- Lease a car: As an alternative to buying a car, you could lease one. This is less commitment and generally cheaper than buying a car.
- Get a cosigner: If you have a close friend or family member with good credit, then consider asking them to cosign your auto loan for you. Just bear in mind the risks and make sure you can afford the monthly payments—if not, your cosigner will be legally obligated to pay your bills for you.
- Take out a small personal loan for a used car: You might have read other sites advising you to do this. While it’s possible, it’s rarely a good idea. Although personal loans are usually unsecured loans, which means it’s harder for your lender to seize your car if you default, they’re also harder to get than auto loans and usually have much higher interest rates (especially if you have bad credit). Buying a car with a personal loan is often a significant financial risk.
Understanding auto loan rates
The rates you’ll get offered for an auto loan depend on several factors, including whether you’re getting a new or used car and what your credit score is. Rates for used cars tend to be higher than those for new cars, and you’ll only qualify for a good rate if you’ve got a decent credit score. While lenders differ, usually this means a score of 661 or above (at which point you’re considered a “prime” borrower).
Depending on these factors, average auto loan rates range anywhere from 2%–21%. 1 In order to determine whether a given rate is truly “good” or “bad,” you’ll need to know what rates are being offered to people in your credit score range for the same type of car loan you’re looking for, which we’ll go over in more detail in the next section.
Other factors affecting the cost of your auto loan
Interest rate isn’t the only factor that goes into calculating how much you’ll pay to finance a car. In particular, these are the three most important factors that you should consider when comparing the cost of different loans:
- Annual percentage rate (APR)
- Loan term
- Loan amount
To give you an idea of how big an impact these factors have on the amount you pay each month and over the life of your car loan, let’s say you’re thinking about taking out a $25,000 car loan with a 3-year loan term and a 10% APR. Here’s how slight changes to these factors would impact the cost of your loan: 3
- Lower loan amount: Let’s say you save up and make a $1,500 down payment. Your loan amount would then be $23,500, which would save you $48.40 per month and $2,032.83 overall.
- Lower APR: Say you wait to take out a loan until you’ve improved your credit score and you qualify for a 4% APR. Getting this lower APR would save you $68.58 per month and $2,468.88 overall.
- Longer loan term: Let’s say you opt for a 5-year loan term instead of a 3-year term. This would reduce your monthly payment from $806.68 to $531.18, saving you $275.50 per month. However, because the interest is accumulating over a longer period, you’d pay $2,830.10 more overall.
Average auto loan rates by credit score
Below is a table showing the average interest rates people received on auto loans in the second quarter of 2021 according to Experian, categorized according to credit score and loan type: 1
| Credit score | New cars | Used cars |
|---|---|---|
| 300–500 | 14.59% | 20.58% |
| 501–600 | 11.03% | 17.11% |
| 601–660 | 6.61% | 10.49% |
| 661–780 | 3.48% | 5.49% |
| 781–850 | 2.34% | 3.66% |
When shopping around for an auto loan, you can use these percentages as a benchmark for differentiating between good and bad interest rates. If a prospective lender offers you a rate that’s below the percentage listed for your score range, then it’s probably good, whereas if it’s a lot higher, then you might want to look elsewhere.
If your score is below 601-660, even relatively good interest rates for your range will result in paying thousands of dollars more than you would with a higher credit score. Think carefully about whether an auto loan is right for you or whether it would be better to explore one of the alternatives listed above.
How to get approved for a car loan with bad credit
The most important factor influencing whether a prospective lender will approve you for a car loan is your payment history. It’s the key contributor to your credit score, and it’s what lenders look at when assessing how likely you are to repay the loan as agreed.
If your credit report shows a history of late payments or an insufficient credit history, then you may have trouble qualifying for an auto loan with a decent interest rate.
Here are some steps you can take to increase your chances of approval:
- Find a cosigner: With a cosigner, your lender is taking on less risk, so they’re more likely to approve you for a loan and offer you better terms. However, as mentioned, cosigning involves some serious risks that you should carefully consider first.
- Make a large down payment: The more you pay upfront, the less you’ll need to borrow and the more serious and reliable you’ll be perceived by prospective lenders.
- Reduce your payment-to-income ratio: In addition to your credit score, many lenders also consider your debt-to-income ratio (DTI), or the proportion of your income that you spend on paying your debts. Auto lenders usually refer to this as your “payment-to-income ratio,” and calculate it slightly differently than lenders of other types of loans. Reducing your PTI will make you a more attractive borrower.
- Check out buy-here, pay-here dealerships: If you’re struggling to get approved for a conventional car loan, then consider exploring your options at a buy-here, pay-here dealership. They’ll finance the car themselves rather than going through a third-party provider, which can increase your chances of success. However, be prepared to be offered relatively high interest rates.
How to improve your credit score for better car loan rates
Here are a few things you can do to improve your credit score before you start shopping around for an auto loan:
- Pay all your bills on time: This is a simple tip, but its importance can’t be overemphasized considering the prominent role of your payment history in both the loan approval process and how your credit score is calculated. Going a few months to a year without any late payments is sure to help your credit.
- Use less credit: Another major factor influencing your credit score is your credit utilization rate (or debt-to-credit ratio). If you have a tendency to heavily use one or more of your credit cards, then going a few months using under 30% of your available credit (ideally under 10%, if possible) will help get your credit in shape.
- Get credit for rent and bill payments: If you always pay your rent and bills on time, then consider signing up for Experian Boost or a paid rent and/or bill reporting service to strengthen your payment history. Some platforms, like Rental Kharma, even report your past payments to give your score an immediate boost.
In addition to taking these steps to improve your credit in the months or years before you get an auto loan, it’s important that you avoid doing anything that might sabotage your progress. Specifically, avoid applying for new credit because doing so can cause a short-term drop in your credit score and indicate to lenders that you may be in financial distress.
What to know before you apply for an auto loan
You’ve already taken the right first step to prepare for the car loan application process by doing your research. Next, you’ll need to do the following things:
- Know your credit score: You have more than one credit score and credit report, and you won’t always know which ones prospective lenders will see. Go to AnnualCreditReport.com to request free copies of your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion). This will give you an idea of what rates you can expect and allow you to check for and dispute any credit-reporting errors. (Note that while the credit reports are free once per year, you may need to pay extra to see the credit score each bureau has assigned you.)
- File all your applications within a 14-day period: Each time you apply for credit, your prospective lender will probably run a credit check. This will produce a hard inquiry on your credit report, which will take a few points off your credit score. If you make all your applications within 14 days (or 45 days for newer FICO models, such as FICO 9), all your inquiries will be treated as one, lessening the impact on your credit. 4
- Consider preapproval from a bank or credit union: Getting preapproved for an auto loan has two major advantages. First, it’ll give you an idea of what cars you can afford, which will help reduce the risk that your application will be rejected. Second, it can be a useful negotiation tool for getting better terms on car loans from a dealership.
- Fully understand your loan terms: Resist the urge to gloss over the fine print when accepting an auto loan. Make sure you understand what your APR is, how much you’ll need to pay each month, what you’ll be paying overall, and what options you have for reducing your payments (e.g., increasing your down payment or getting a cosigner).
