If you’re struggling with poor credit but you need a new car, then there’s good news: you can buy a car and even get a car loan. However, your options will be limited, and you’ll probably be stuck with high interest rates.
To get the best deal on auto financing, you need to know what to expect from a bad-credit auto loan and how to avoid common pitfalls when car shopping.
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Can you finance a car with bad credit?
Yes, you can absolutely get a car loan with bad credit. There’s no industry-wide credit score requirement for buying a car, and some lenders offer financing specifically for people with subprime credit.
However, be warned that you won’t get the best loan terms. A low credit score signals to lenders that you’re a high-risk borrower and that you may have trouble paying your bills on time, so lenders will compensate for the added risk they’re taking on by charging you more.
If you’re a subprime borrower (meaning you have a credit score in the range of 501 to 600), lenders may also ask you to provide additional income and employment documentation to prove that you can repay your debt. This is even more likely if your score is lower than that (in which case you’re considered a deep subprime borrower).
How bad credit will affect your loan terms
A bad credit score will seriously affect the terms of the car loans you’re offered. For instance, lenders will consider your credit score when deciding the following details of your offer:
- Interest rate and annual percentage rate (APR)
- Length of the repayment period
- Minimum down payment
Your credit score is the number one factor that influences your interest rate, so be prepared to pay more overall if you’re applying for financing while your credit score is low.
The table below shows the average APR you can expect to qualify for with credit scores in different ranges.
Average Auto Loan APRs According to Credit Score
|Auto Loan Rates By Credit Score 2021|
|Credit Score||Average APR New Car||Average APR Used Car|
As you can see, bad-credit car loans can get very expensive. Think carefully about whether you need a car right now. If you’re not in a major rush, you’d be better off financially by waiting at least a few months until you’ve improved your credit score.
7 tips for getting a car loan with bad credit
Even if you have subprime credit, by being a smart shopper and following a few expert tips, you may still be able to get a decent deal on an auto loan.
1. Check your credit first
Knowing your credit score is important for getting a good understanding of your borrowing power and what interest rates you can expect on your car loan.
There are several ways to check your credit score, including:
- Checking your account statements on any existing credit cards or loans that you have
- Getting a free credit score check
- Enrolling in credit monitoring
It’s also important to review all three of your credit reports for errors. Mistakes are surprisingly common, and they can cause a major drop in your credit score and make it harder to qualify for new credit accounts.
You can request your credit reports for free at AnnualCreditReport.com. If you spot any errors in your credit file, dispute the item on your credit report with the credit bureau that’s making the mistake (Experian, Equifax, or TransUnion).
2. Get preapproved
Getting preapproved for an auto loan will give you an idea of how much financing you can get and help you budget more effectively. A preapproval offer will also help you narrow down your options, compare the total costs of different cars, and negotiate better deals with car dealers.
You can generally apply for preapproval online, over the phone, or by visiting a local bank or credit union in person.
It’s worth noting that the loan amount stated in your preapproval offer is the maximum amount you can borrow. Depending on your budget and the type of car you want, you can always borrow less.
3. Save up a large down payment
After you get a loan offer, you should decide on your budget and make sure you can make a down payment. There’s no standard amount you need to offer, but a bigger down payment may get you a lower interest rate.
A good rule of thumb is to aim for a down payment of at least 10% on a used car or 20% on a new car. 1
Can you get an auto loan with no down payment?
Although some lenders provide auto financing with no down payment, these offers are rarely available to borrowers with bad credit. 2
4. Consider getting a cosigner
If you have a relative or close friend who has a good credit score, consider asking them to come with you to the dealership to cosign your auto loan application.
You’ll get better loan offers if you have a cosigner because your lender will be able to hold them legally responsible for your debt if you stop making payments. Obviously, this is a big financial commitment for both parties, and you should both carefully consider the implications beforehand.
5. Shop around
Many people make the mistake of walking into a car dealership, falling in love with a particular car, and then saying yes to whatever financing terms the car dealer offers. You’ll almost certainly end up paying more money this way.
By getting multiple quotes and comparing rates, you’ll be able to avoid getting ripped off and can use your knowledge to negotiate a better deal.
When comparing offers, don’t just look at the monthly payment amount—make sure to also pay close attention to the interest rate, annual percentage rate (APR), and loan repayment period, as they make up the overall cost of your loan.
6. Make sure you understand your loan contract
Financing a car is a bigger deal than many other types of financing, partly because of the relatively large amount of money you’ll pay and partly because of the role that the car will play in your daily life.
Some lenders bury hidden fees in the fine print, so make sure to read your loan agreement very carefully. Keep an eye out for the following:
- Additional fees
- Changes in your terms after a certain number of months
- Minimum monthly payment (and the monthly payment required to repay your loan on time—make sure to check whether these are different)
- Prepayment penalties
- Number of days you can be late on a payment before it will trigger a repossession
Never fall so in love with a deal that you fail to read the terms. If an offer seems especially good, you should pay more attention to the contract you’re agreeing to, not less.
In other words, if a loan seems too good to be true, then it probably is.
7. Think about refinancing your loan at some point
If you need to take out a car loan but poor credit is keeping you from getting a good interest rate, not all hope is lost. As long as you make regular, on-time payments, your credit score will be higher in a year or so and you’ll be able to refinance your auto loan and get better terms.
To do this, just call your lender and tell them you’d like to refinance. When you review their offer, make sure to take into account factors that may add to the overall cost of your loan, such as early repayment fees and a longer repayment period on your new loan.
Where to get an auto loan if you have bad credit
You have three main options when it comes to taking out a car loan with bad credit. We’ve listed them (and their pros and cons) below.
Your bank or credit union
You may be able to get better financing deals from a bank or credit union you’re already a member with, so this is a good place to start checking out your options. This is because you already have a relationship with them and they want to keep your business.
Try calling up your bank and asking what types of loans they offer and what the credit requirements are. It’s helpful if you have an idea of how much you want to borrow and what your credit score is.
If you can secure a loan from a reputable credit union or bank, this is your best option. However, the worse your credit is, the less likely this is to work out.
Bad-credit auto financing companies
Bad-credit car loans (also called second-chance car loans) are a type of auto financing available to borrowers with a troubled credit history. Many car loan providers operate online, which makes it easy to search for and compare offers.
Start by checking out the best car loans currently available to people with bad credit:
Getting a car loan straight from a dealership is a convenient option since it allows you to go straight in and buy a car without applying for a loan first. However, this convenience usually comes at a price.
With dealer-arranged financing, you’re still getting a loan from a separate lender, but the car dealership applies for the loan on your behalf. In this case, they can charge extra fees or hike up the interest rate and keep the extra money you’re paying each month as compensation for handling your loan application. 3
If you do opt to get a loan through a car dealership, don’t be afraid to negotiate better terms. Dealers are pretty much always getting something extra from the deal, so there’s a bit of wiggle room for them to drop their rates or the price of the car.
Buy-here, pay-here car dealerships should be a last resort
If you’re getting rejected for auto financing everywhere you go, it can be tempting to settle for in-house financing from a bad credit car dealership.
With in-house financing, you’re cutting out the middleman by borrowing money directly from the dealership. While this makes it easier and more convenient to buy a car with bad credit, this option often has major drawbacks you should carefully consider: 4
- Fewer cars to choose from
- Larger down payment required
- Higher chance of repossession
Nevertheless, these companies often have very low credit requirements (or even none at all). This means in-house dealership financing may be a last-resort solution if you literally can’t get a car loan any other way.