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 better financial decisions by providing you with financial calculators and interactive tools as well as publishing original and impartial content. This allows you to conduct research and compare data for free to help you make informed financial decisions. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site are from companies that compensate us. This compensation may impact how and when products appear on this website, for example, for example, the sequence in which they be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage home equity, mortgage and other products for home loans. But this compensation does not influence the content we publish or the reviews that you read on this site. We do not contain the universe of companies or financial offerings that could be available to you. Anna Kraynova/Getty Images
6 min read Published March 02, 2023.
written by Hanneh Bareham. Written student loans reporter Hanneh Bareham is an expert in all matters connected to student and personal loans and helping you finance your next project. She is determined to assist people achieve their collegiate and financial goals through making loans simpler to comprehend. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to control their finances through providing concise, well-studied information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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They ensure that what we write is objective, accurate and trustworthy. We have loans reporter and editor focus on the points consumers care about most — various types of loans available and the most competitive rates, the best lenders, ways to pay off debt , and many more. So you can feel confident when making a decision about your investment. Integrity in editing
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There are money-related questions. Bankrate has answers. Our experts have helped you understand your money for over four years. We continually strive to give our customers the right advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict policy, which means you can be confident that our content is honest and precise. Our award-winning editors and journalists produce honest and reliable content to help you make the right financial choices. Our content produced by our editorial team is factual, objective and is not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates and useful tools to you , by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products and services, or through you clicking certain hyperlinks on our site. Therefore, this compensation may impact how, where and when products appear within listing categories in the event that they are not permitted by law. We also offer mortgage home equity, mortgage and other home loan products. Other factors, such as our own rules for our website and whether or not a product is available in your region or within your personal credit score could also affect the manner in which products appear on this site. While we strive to provide a wide range offers, Bankrate does not include details about every credit or financial products or services. If you have a low credit score, you might be concerned about whether you will get approved for an auto loan from a traditional lender. However, before you take out a loan through a buy-here-pay-here dealer take a look at all of the options. Even though you may have bad credit — a credit score between 300 and 500 may make getting a loan more challenging, it isn’t impossible. Additionally, you’ll notice that borrowing costs are far lower when you use a bank credit union, or online lender regardless of your credit score. Steps to get a car loan that are based on bad credit Prepare on several areas prior to starting the application process for an auto loan that has bad credit. Pay special attention to your credit score and make certain that the terms are all in place prior to making the purchase. 1. Know your credit score Before you begin the shopping process make sure you check your credit score. Based on the FICO credit scoring system that can range from 300-850 scores, any score less than 580 is considered as poor. The FICO score will be calculated on the basis of factors like how much you owe, the duration of your credit history and the history of your payments. Not making your payments punctually, spending more than your available monthly credit and having a bad credit history could all affect the credit score. The Bankrate advice
When you apply to get an auto loan be sure to avoid opening the credit cards of your new loans. Be sure to do this prior to when you begin shopping can put you in a more favorable situation with the lender.
2. Make a savings account for a down payment If you’re not able to pay a down payment credit score, getting an automobile can boost your chances of securing and being accepted for the auto loan. Making a small amount of cash every month for a downpayment can help offset the higher interest rates resulting from having a low credit score. It also could reduce your loan-to value ratio, allowing you to be eligible for better conditions. Experts recommend a down payment that is at least 20 percent however if that’s just too much, you can pay what you are able to afford. It is possible that dealers who work with credit-challenged clients will allow as little as $1,000. 3. Research as thoroughly as you can so that you don’t get surprised when it’s time to bargain. When you’re applying for a loan make sure you know what are the most common APRs offered by auto lenders. If you have an bad credit score, you’ll likely be offered some of the most expensive rates advertised. If you’re purchasing a used car, it also helps to be aware of the condition of your preferred car. 4. Shop around Once you begin your search, don’t limit yourself to just one lender. There are numerous lenders that can help you get an loan, including: Banks as well as credit unions. If already have a relationship with a bank or credit union, you can start here. Some credit unions and banks offer discounted rates for members. Online lenders: A lot of online lenders provide a prequalification tool on their websites. This allows you to determine the conditions you could be eligible for prior to applying. This will save you from having a hard credit check in case you don’t meet the standards. Car dealerships: You can be approved if you meet the financial and credit requirements. You’ll have a meeting with an official from the finance department and they will send your details to various lenders. Certain dealerships might offer loans to people with bad credit history. However, dealerships often mark up the rates they provide to make more money from the deal. Pay-here and buy-here dealers are a good option. Pay-here or Buy-here dealerships are useful when you aren’t accepted by an institution or lender for an loan however, be careful. While these dealerships may be more likely to approve a person who has a credit card, the rates are often much higher. Bankrate tip
They conduct a hard credit check when you apply. It’s wise to consider at least three different lenders in a 14-day period to ensure your credit score won’t take multiple hits.
5. Prequalify with lenders Prequalification allows you to determine whether you’re eligible to receive the loan prior to submitting an application and also view the estimated loan terms. Plus, you’ll save time on applications and avoid the needless credit checks that could adversely affect the credit rating. Once you’re pre-qualified with several lenders, you can submit documentation and get preapproved. It’ll result in a hard credit report, however the loan is more important because it represents the lender’s commitment to provide an auto loan towards you. You’ll also have leverage in the car dealership and negotiate with them as cash buyers. 6. Make sure that the terms are final. Avoid subprime lending Subprime lenders could seem like a sure choice for those who are trying to obtain a car loan with bad credit. They usually target those with less credit scores and can make the car purchasing process seem effortless and easyinitially. But they may come with astronomically high rates of interest and could mean the payment of thousands of dollars on interest for the course of the loan. Bankrate tip
Do not consider subprime lenders if you cannot find another option for financing.
7. Shop loan terms, not monthly payments Lower monthly payments appear attractive on paper and are usually used to lure buyers. They could result in you spending more on your car over the course of the loan because they . Since the car loans specifically designed for bad credit have higher APRs and you could end up paying thousands more than your car’s worth by the expiration of the loan because of the interest accrual. When shopping for a car for a loan, you should look for the best terms — usually the lowest APR over the shortest time. So, you’ll be able to make more affordable monthly payments with reasonable interest rates. If you can’t find a low APR, consider shopping for another vehicle. 8. Bring a companion along — and consider a co-signer Ask an acquaintance or family member to go with you, according to Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the table to negotiate can inspire confidence. In turn, confidence, coupled with knowledge, may result in more favorable loan conditions. Think about asking a trusted person in your family or friend to serve as a . Ideally, the person should have a steady earnings source, strong credit score, and an outstanding credit history. Co-signers reduce much of the risk for lenders -as the co-signer is accountable for the loan should you default on your repayments. Adding a co-signer can be an advantage and typically results in lower interest rates. 9. Watch out for add-ons or scams Nonprime buyers are more likely to encounter loans that do not include essential goods and services, says Josh Frank, former senior researcher for the Center for Responsible Lending. Other costs, including , can pile up for buyers who are not prime. Do not sign up for any loan which is contingent on certain things, like extended warranties, after-market services or . Pay attention to these add-ons particularly if you have to make an application at a buy-here, pay-here dealership or you are planning to trade in your vehicle. And understand that rolling these charges into your loan is a way to be paying more interest during the loan time. 10. Make sure that the terms are in place if you purchase a loan with a broker, make sure to make sure the terms are in place before you sign. If you don’t, you could be charged more monthly. Certain dealers that are scams tell buyers their financing is not fully completed until after the buyer completes the purchase. They then inform the buyer that they have to accept a higher interest rate or even return the vehicle. This is called . Where can I find the bad credit car loan Car loans are available through most bank, credit unions and online lenders. There is also dealership financing, as mentioned above. However, if you’ve got bad credit, you’re more likely to be able to secure a loan with reasonable terms through an online lender. Certain credit unions will approve you for the bad credit car loan if you have a solid track record with their institution. Take a look at Bankrate’s recommendations for the best to explore options. Bad credit car loan APRs Borrowers who have excellent or good credit scores get the most attractive auto loan deals. That doesn’t mean you’ll automatically have less options even if your credit score is less. But, the cost of borrowing are likely to be more expensive due to the risk that you take on the lender. Here’s a breakdown of current average interest rates by credit score for the fourth quarter of 2022 The credit score range
New car
Cars 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%
The next step is to take if you are in the process of establishing bad credit, it may be tougher for you to secure a car loan. You could face less favorable terms or even unfair lending practices. It’s good to know that conducting research, saving up for a down payment and getting preapproved will help you prepare to get the best deal in an auto loan. If you that’s right for you, be sure to make punctual payments to improve your score on credit. Then, you may be eligible for a loan with more favorable 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 others reach their collegiate and financial goals by making loans easier to understand. The article was edited 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 the confidence to take control of their finances with precise, well-researched and thorough information that breaks down otherwise complex topics into manageable bites.
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