Getting a Car Loan if You Have Bad Credit
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If you have bad credit it may be more difficult to get a car loan, but it's not impossible. Some lenders will charge higher interest rates, but you can shop around for loans to see which lender will give you the best terms. You can also work to improve your credit so you'll have even better options in the future.
Written by Attorney Eric Hansen.
Updated November 29, 2021
You might think that it’s next to impossible to get a car loan if you have bad credit. Though that isn’t true, it may be trickier. For example, you might not get as good of a deal on the car loan terms. This means you might have a higher interest rate on the loan. Still, it’s possible to get a car loan even with a bad credit history.
There are many lenders that will work with borrowers that have poor credit. You’ll want to carefully research and compare loan terms just as much as you look at dealership lots or online car sale ads. This article will discuss how to prepare to get a new auto loan with bad credit, where to find financing options for subprime auto loans, and what to do before and after you get a car loan.
Preparing To Get a New Auto Loan
Bad credit doesn’t exclude borrowers from getting auto loan financing. Many lenders will work with and negotiate auto loans for borrowers with bad credit scores. These lenders include financial institutions such as credit unions, local banks, dealer finance companies, and online lenders. Some lenders don’t advertise that they provide financing for those with poor credit, so you’ll have to look around and ask questions.
Do Your Research & Know Your Budget
If you’ve decided that you’re in the market for a new car or a used car that’s new to you, you’ll have to do thorough research. You’ll want to research the vehicles you’re considering purchasing, their maintenance and insurance costs, safety issues, warranties, and more. And you’ll also need to know your own credit history and your financial situation. This includes looking at your credit reports and credit scores to see what auto loan financing you might qualify for. Knowing the circumstances of your financial well-being and your credit situation is very important when it comes to auto financing.
Develop a game plan and a realistic budget when you’re looking to purchase a vehicle. If you’re not sure what you can afford, a tool like an online loan calculator can help you better understand what your monthly payment will be for a car loan. You’ll also want to read up on important loan terms. Terms like the Annual Percentage Rate (APR) can be the difference between a good loan and a bad one. APR affects both your monthly payment and the total cost of the loan.
Know Your Credit Score & What’s in Your Credit Report
To help you prepare financially, it’s smart to get a free copy of your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) every year. It’s also wise to get those credit reports and your credit scores before you apply for a car loan.
Lenders put borrowers’ credit scores into five categories. Your FICO score will affect your loan terms and interest rates. The five categories are:
800-850 Exceptional – The best of the best. Borrowers with an exceptional credit rating get the best terms and the lowest interest rates.
740-799 Very Good – Still pretty good. These folks receive lower interest rates than most and usually don’t have a hard time getting approved for a loan.
670-739 Good – Nothing to sneeze at here. Borrowers with a good credit rating receive favorable terms and lower interest rates.
580-669 Fair – Not bad, but not good. You’ll want to shop around and see what’s out there if you have a fair credit rating.
300-579 Poor – Borrowers with a poor credit rating usually get higher interest rates and less favorable car loan terms. This means their monthly payments are higher and they pay more interest over the course of the auto loan.
Remember that a higher credit score typically translates to a lower loan interest rate and lower monthly payments. A lower credit score equals higher interest rates and higher car payments. If possible, you might want to consider waiting to purchase a car if you have a fair or poor credit rating. Delaying a car purchase gives you time to repair your credit and boost your credit score. Then, when you go to purchase a vehicle, your credit rating will be higher and so will your chances of getting better terms and a lower interest rate, which saves you money.
In addition to your credit score and your credit history, lenders will also look at other factors to determine whether or not they’ll approve your auto loan application. These factors include your personal financial stability, your debt to income ratio, the length of time you’ve been employed at your current job, and how long you’ve lived at your current address.
Increase Your Odds of Qualifying With a Down Payment or Cosigner
While you’re preparing to get a loan, think about a down payment and a potential trade-in. Having a larger down payment, a high-value trade-in vehicle, or both will lower the loan amount and increase your odds of getting it. Also, if you expect to have a large cash influx in a few months — through a bonus or tax refund, for example — you may want to plan to use that money for a larger down payment. Having someone cosign on the car loan can also help you qualify for auto financing. Some lenders will require borrowers with bad credit to have a cosigner.
Subprime Auto Loans: What You Need To Know
If you have bad credit and absolutely need a car loan, you may want to consider a subprime auto loan. Subprime auto loans are for borrowers whose credit score is 620 or lower. These loans have much higher interest rates and higher fees. This helps off the risk lenders take when they lend to subprime borrowers. Subprime loans often also include things like prepayment penalties, which are designed to keep borrowers in the loan for longer by discouraging them from paying off the loan early.
If you’re set on getting a car loan and you only qualify for a subprime auto loan, look around and compare auto lenders. Don’t take the first loan you look at, and be ready to say no to loans with bad terms. You can make the process easier and see what terms you qualify for by seeing if lenders will allow you to pre-qualify for an auto loan.
You can shop for a subprime auto loan at credit unions and banks. If you’re already a customer with a credit union or bank, this can work to your advantage. Online lenders also offer subprime auto loans, but be careful and do your homework.
Buy-Here, Pay-Here Dealers
You can also find used car loans at buy-here,pay-here dealerships. These dealers often don't do credit checks. Instead, the dealer will just verify your income, employment, or other financial factors. If you have bad credit, you may be relieved to be able to get a loan without a credit check, but the trade-off is that these dealerships often charge very high interest rates.
They also don’t always report positive payment history to the credit bureaus, but you can bet that they will report missed payments, past due status, delinquency, and defaults. This means getting this type of loan won’t help your credit like traditional loans do when you make on-time payments, but it can seriously damage your credit if you miss payments. These dealers are frequently on the list of creditors in a lot of Chapter 7 bankruptcy case filings as many borrowers have a difficult time paying off those dealerships’ subprime auto loans.
You can also try an online lender like Carvana and Capital One Auto Finance. Carvana offers subprime auto loans to borrowers but they must use the financing to purchase a vehicle that’s part of Carvana’s used car inventory. Capital One Auto Finance offers subprime auto loans to borrowers who purchase new or used cars at a car dealership in its member network. If you have an existing auto loan from an out-of-network lender, you may be able to refinance with Capital One.
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Before You Get a Car Loan
When you are ready to buy a car with a subprime auto loan, consider pre-qualification and preapproval. Try to get preapproved from several different lenders to see what your best loan options are. Comparison shopping, getting prequalified, and getting preapproved by multiple lenders, is important whether your credit is good or bad. Preapproved buyers have stronger negotiating power at the dealership or with a private party seller.
Preapproval also helps you budget. It gives you a better idea of what the purchase amount and monthly payments will be. And it can help you narrow down your vehicle choices. When you budget, remember to think about all the costs of car ownership, including car insurance, maintenance, and gas. Doing some research and making a budget before you buy can help you avoid defaulting on payments or having your car repossessed.
Just because you get preapproved doesn’t mean that you have to take the loan. You can say no and walk away — as long as you haven’t signed off on the contract — if you don’t like the loan terms, loan amount, or the vehicles in the price range of the preapproved loan offer. If you do like the terms, it’s also a good idea to ask your lender whether or not they report monthly payments to the credit bureaus. If they don’t report your monthly payments, it won’t help you build a positive payment history and better credit score.
After You Get a Car Loan
After you take out a subprime auto loan and use that financing to purchase a vehicle, make sure you’re making all your monthly payments on time. If your lender does report your monthly payments to the credit bureaus, this will help you establish a positive payment history on your credit report. Taking out the loan can also help improve your credit mix, which is how many different kinds of credit you have (loans, credit cards, lines of credit, etc). Both of these will help boost your credit score so long as you avoid other negative marks on your credit file.
Remember that subprime auto loans or other types of financing for those with low credit scores will likely come with a higher interest rate. Before you commit to a loan, be certain that you can comfortably afford the monthly payment. Having a higher interest rate means your monthly payments will also be higher. If you miss payments, make late or partial payments, or otherwise become delinquent and default on the loan, you risk having your vehicle repossessed, which will cause serious damage to your credit. That makes it even more difficult to get new lines of credit such as a credit card or consolidation loan or to refinance your student loans.
Also keep in mind that, unlike homes, cars usually depreciate with age and use. If you take a loan with a long term or repayment period to get lower money payments, you risk going upside-down on your loan. This means you owe more on the car than the car is worth. If this happens and you want to sell the car, you’ll have to make up the difference between the sales price and the amount you still owe on the loan.
Just because you have bad credit doesn’t mean that you can’t get financing on a used or new car. Many financial institutions offer car loans to people with bad credit. These subprime auto loans help people who have bad credit qualify for an auto loan. That said, bad credit auto loans have a higher interest rate and APR, which can make for a high monthly payment. But not all loans are the same, so shop around and compare different lenders and terms to find the best option for you. Getting preapproval is also very helpful when you have bad credit.