Buying a car is often a necessity, but if you have bad credit, securing a car loan can feel like an uphill battle. Many lenders use credit scores to determine your ability to repay the loan, and a low score can make the process more challenging. However, having bad credit doesn’t mean you’re out of options. Many lenders specialize in loans for people with poor credit, and with the right approach, you can improve your chances of approval.
This article will cover everything you need to know about getting a car loan with bad credit, including what bad credit is, how it affects car loans, where to find lenders, and strategies to improve your chances of securing financing.
Understanding Bad Credit
Credit scores typically range from 300 to 850, with higher scores indicating better creditworthiness. In general:
- Excellent Credit: 750–850
- Good Credit: 700–749
- Fair Credit: 650–699
- Poor Credit: 550–649
- Bad Credit: Below 550
Bad credit can result from missed payments, high credit utilization, defaults, bankruptcies, or having little to no credit history. Lenders view borrowers with low scores as higher risks, which means they may charge higher interest rates or require larger down payments to offset that risk.
Can You Get a Car Loan with Bad Credit?
Yes, you can still get a car loan with bad credit, but it may require more effort and planning. Lenders that specialize in bad credit loans understand that not everyone has a perfect financial history. However, they typically charge higher interest rates, offer shorter loan terms, or require collateral.
Here’s what to expect when applying for a car loan with bad credit:
1. Higher Interest Rates
Since bad credit signals higher risk, lenders often charge increased interest rates. While someone with excellent credit may get a loan with an annual percentage rate (APR) of 4–6%, borrowers with bad credit may face rates as high as 15–25%.
2. Larger Down Payment Requirements
To reduce risk, some lenders ask for a bigger down payment, often 10–20% of the car’s purchase price. A larger down payment lowers the loan amount and reassures the lender that you’re serious about repaying.
3. Shorter Loan Terms
Bad credit car loans often have shorter repayment periods (36–48 months instead of 60–72 months), which can mean higher monthly payments. However, this also reduces the total interest paid over time.
4. Prepayment Penalties
Some bad credit loans have prepayment penalties, which means you could be charged extra if you try to pay off the loan early. Always check the loan agreement for hidden fees.
Where to Get a Car Loan with Bad Credit
Even with bad credit, several financing options are available:
1. Traditional Banks and Credit Unions
Large banks may have strict requirements, but some offer bad credit loans. Credit unions are often more flexible and willing to work with members who have low credit scores.
2. Online Lenders
Many online lenders specialize in bad credit auto loans and allow you to compare multiple offers. Websites like Auto Credit Express, Carvana, and myAutoloan cater specifically to borrowers with poor credit.
3. Buy Here, Pay Here (BHPH) Dealerships
BHPH dealerships offer in-house financing, meaning they lend money directly instead of using a third-party lender. These dealerships often approve buyers with bad credit but may charge extremely high interest rates.
4. Subprime Auto Lenders
Subprime lenders specialize in loans for people with low credit scores. Companies like copyright Auto Finance and RoadLoans provide car loans to borrowers with credit issues.
How to Improve Your Chances of Approval
If you’re struggling with bad credit, there are steps you can take to increase your chances of getting approved for a car loan.
1. Check and Improve Your Credit Score
Before applying, check your credit score with free services like Experian, Equifax, or TransUnion. If your score is close to a higher range, taking time to improve it could help. Pay off overdue accounts, dispute any errors, and reduce outstanding balances.
2. Save for a Bigger Down Payment
The more money you can put down, the less risk the lender takes on. A larger down payment not only improves approval chances but also lowers your monthly payments and total loan cost.
3. Get a Cosigner
A cosigner with good credit can help you qualify for a better loan. The cosigner agrees to take responsibility for the loan if you fail to make payments, reducing the lender’s risk.
4. Choose a More Affordable Car
Opting for a less expensive car means borrowing a smaller amount, which increases your chances of approval. Avoid high-end models and look for reliable used cars with lower price tags.
5. Shop Around for the Best Loan Offers
Different lenders have different criteria, so don’t settle for the first offer. Compare multiple lenders to find the lowest interest rates and best terms.
6. Show Proof of Income and Stability
Lenders want to see that you can afford the payments. Provide proof of steady income, such as pay stubs, tax returns, or bank statements. A stable job history and residence can also strengthen your application.
7. Consider a Secured Loan
If you’re struggling to get approved, a secured loan might help. In this case, the vehicle itself serves as collateral, reducing the lender’s risk. However, if you default, the lender can repossess the car.
8. Get Preapproved
Preapproval allows you to see how much a lender is willing to offer before shopping for a car. This gives you an idea of your budget and strengthens your negotiating position with dealerships.
9. Negotiate Loan Terms
Even with bad credit, some lenders may be open to negotiating. If you receive multiple loan offers, use them as leverage to secure better terms.
10. Avoid Scams and Predatory Lenders
Desperate borrowers are often targeted by predatory lenders offering "guaranteed approval" loans with excessive interest rates and hidden fees. Always read the fine print and research lenders before signing any agreements.
Rebuilding Your Credit for Future Loans
If bad credit is making it difficult to get a favorable car loan, consider taking steps to rebuild your credit for future financial opportunities.
1. Make On-Time Payments
Payment history is the biggest factor in your credit score. Always pay your car loan and other bills on time to boost your credit rating.
2. Pay Down Existing Debt
Lowering your credit card balances and reducing overall debt can improve your credit utilization ratio, which helps increase your score.
3. Avoid Opening New Credit Accounts
Opening multiple credit accounts in a short time can lower your score. Only apply for new credit when necessary.
4. Keep Old Credit Accounts Open
Even if you don’t use them, keeping old credit accounts open helps maintain a longer credit history, which can positively impact your score.
5. Monitor Your Credit Regularly
Check your credit report often to spot errors and fraudulent activity. If you find mistakes, dispute them with the credit bureaus to get them corrected.
Final Thoughts
Getting a car loan with bad credit is possible, but it often requires more planning, research, and financial discipline. By understanding how bad credit affects your loan options, exploring different lenders, and taking steps to improve your credit, you can increase your chances of securing an affordable auto loan.
If possible, work on rebuilding your credit before applying for a loan. Even a small improvement in your score can lead to better interest rates and savings over time. Whether you need a car immediately or have time to prepare, taking a strategic approach will help you secure the best loan terms available.