When you have bad credit and need to get yourself a new vehicle, it can be a real financial challenge. It’s not that you can’t get a car loan, but having a low credit score makes the process a lot more stressful for you.
Buying a car is already a huge pain to deal with, so when you toss in a low credit score that vehicle financing becomes even more of a pain.
I know this first hand because I had to declare bankruptcy in my 20’s and I had to get a car loan after my old car got repossessed.
Fortunately, it’s not impossible to get a car loan when you have terrible credit, you just end up paying a higher interest rate for it. There are even some lenders who specialize in car loans for bad credit.
Having been there myself, I’ve created this guide to help you navigate the challenges of finding a good car loan when you have bad credit.
Top Picks For The Best Bad-Credit Auto Loans
Before you even think about heading to a car lot to shop for your new vehicle, take some time to prepare in advance. You should check your credit score, figure out how much car you can afford, and what you want to do about financing.
You already know that having bad credit means that you’re going to have limited options compared to other buyers.
In fact, the car dealership may not be able to offer you any financing at all if your credit score is the lowest of lows. This is something you need to be prepared for BEFORE you end up sitting at that table at the car lot.
The best thing that you can do for yourself is to check with some automotive financing companies that specialize in lending money to people with bad credit.
Since I’ve had to do this myself in the past, I’ve got some recommendations for you to check out below.
This company has been around for more than 20 years helping people just like you and me get financing when our credit scores were at their lowest.
Auto Credit Express works both with people who have bad credit as well as people who have no credit. Heck, they’ll even help you out if you have good credit.
Here they focus on helping people repair damaged credit through realistic opportunities for auto loan approvals – even if you have a recent bankruptcy on your credit report.
Auto Credit Express helps car buyers with poor credit scores connect to automobile dealerships that may give them a second chance and can get them approved fast for sub-prime auto financing, even with zero or $500 down.
To get a loan with Auto Credit Express, you do need to show a monthly income of at least $1,500. They do not have a credit score requirement.
You’re in good hands if you decide to use Auto Credit Express. They have an A+ rating with the Better Business Bureau and a 4.7 rating with over 2,700 reviews at Trust Pilot.
If you’re shopping for a used car with bad credit, then Carvana might be the perfect option for you. The only catch is that you have to buy one of their vehicles in order to finance with them.
Carvana is a really nice car buying experience because it completely removes you from the hassle of a car dealership and all that wheeling and dealing that they do when you’re trying to get a new vehicle.
You can really save a lot of time with Carvana since you can have the car you buy delivered to your home, if you don’t want to go and pick it up. This is really convenient if you are currently without a vehicle.
Even though my credit score is now good, my next car purchase will come from Carvana.
If you’re interested in giving Carvana a chance, they do require that you earn at least $10,000 annually in order to obtain financing. They don’t share any specific credit score requirements, so give them a shot if you meet the minimum income requirements.
I’m not sure if they were around back when I was having my own credit problems, but Car.Loan.com is a decent choice for finding bad credit auto financing these days.
What you need to know about Car.Loan.com is that they are not a finance company, instead they help to match you with lenders who specialize in bad credit auto loans.
Basically, they’re an aggregator site. But they are useful because you can get more than one option and then choose the one that you prefer.
Car.Loan.com has been in business since 1994 and they work by connecting you with a dealership in your area that can work with you on finding the best option for your financial situation.
They don’t have any minimum income or credit score requirements on their website.
4. Cars Direct
Cars Direct helps you find a car in your local area and then pairs you with lenders who specialize in bad credit auto financing. They tout low down payment options, even for people with bad credit.
In order to qualify for auto financing with Cars Direct, you need to show income of at least $500 per week. That’s it!
No minimum credit score is listed on their website, but since they work with other lenders you may discover a credit score requirement does exist.
Their financing application process is done completely online and it’s a quick and easy process.
If you want to compare multiple offers from lenders, then my.Autoloan.com is another good option for you. It’s also an aggregator site that brings up multiple lenders after you complete their application/quote form.
With my.Autoloan.com, there is no minimum income requirement or credit score because they are not actually a lender.
This means that the requirements will vary amongst the various lenders that they show you after you enter in your information and the offers from the lenders.
The offers that you get are just pre-approvals, which means that you’ll have to submit additional information for consideration. After that, you’ll either get approved or denied for the financing.
It’s usually a relatively quick process with my.Autoloan.com and the lenders they work with.
6. Capital One
You may already have a credit card from Capital One, since they have credit products specifically for people with bad credit. They also have some auto loans for bad credit that you may qualify for.
Capital One does have some minimum requirements that must be met, so it will eliminate some people with really low credit scores.
And since Capital One pre-qualifies you for the auto loan, you can put in an application without needing to worry about the inquiry damaging your credit score.
How Bad Credit Affects Your Car Loan
The biggest impact of your bad credit when it comes time to get some vehicle financing is going to be the interest rate that you get on the loan.
The truth is that it’s going to cost you a lot more than you’d like to finance that vehicle.
And there’s a good chance that you’re going to see a double digit interest rate.
Having bad credit means that you end up paying more (sometimes a lot more) for a vehicle than do people with fair or good credit.
It’s important to note that the price you see the car listed for sale at doesn’t change just because you have bad credit. It’s the interest rate that changes based on someone’s credit score.
That means the amount of interest that you end up paying over the lifetime of the car loan is a higher amount than someone with good credit.
The exact interest rate that you’ll get for your car purchase varies by credit score.
The people over at Experian recently shared the average interest rate by credit score, which you can see in the table below.
|Credit Score||Average New Car Rate||Average Used Car Rate|
|Deep subprime (579 or below)||14.39%||20.45%|
|Subprime (580 – 619)||11.92%||17.74%|
|Nonprime (620 – 659)||7.65%||11.26%|
|Prime (660 – 719)||4.68%||6.04%|
|Super prime (720 or above)||3.65%||4.29%|
You should also know that your interest rate can also vary if you finance a vehicle purchased through a franchise dealer versus an independent dealer. In general, franchise dealers can net you a slightly lower rate.
As you can see in the chart above, the difference between having a credit score of 500 versus 600 can add up when it comes to automotive financing. Those three percentage point differences might seem small, but you’re looking at difference of at least $50/month on your payment, or several thousands dollars over the lifetime of the auto loan.
Plus, this doesn’t include all the extra vehicle expenses you’ll have like car insurance, registration, etc.
And your low credit score also results in a higher cost for car insurance.
Terms You Should Know Before Applying For A Car Loan
If this is your first time applying for auto financing, or even if it isn’t, there are some common terms that you should know. Car dealers and lenders all use this lingo, and you should familiarize yourself with it in advance.
- Loan term: This refers to the number of months that will be paying back the loan. The shorter the loan term, then the lower the interest rate – but the higher monthly payment. And the longer the loan term, then the higher the interest rate – but the cheaper monthly payment. The most common loan terms are either 48-months (4 years) or 60-months (5 years). Make sure you know how long you’re committing to pay before you sign the financing paperworks.
- Interest rate: This is how much you’ll be charged to borrow the money for your vehicle. This is expressed as a percentage, typically the annual rate (APR). The lower this number, the cheaper you get the car in the end.
- Pre-approval or Pre-approved: This means that based on preliminary information that you’re approved, but you can still end up unapproved. When you have a pre-approval, then lender hasn’t done a full credit application on you (it’s a soft pull). So, once they get the full information submitted, you may end up with a denial, or a different approval rate, in the end. Just know that pre-approvals are not set in stone and can change.
- Hard vs soft credit pull: A soft credit pull doesn’t go on your credit report as in inquiry and it doesn’t hurt your credit score. A hard credit pull does go on your credit report as an inquiry and it does hurt your credit score. It’s a good idea to ask a lender if it will be a hard or soft pull when they tell you they want to submit a credit application for you.
Should You Use A Co-Signer For Your Car Loan?
If you’re struggling to get a car loan with your bad credit, or if you want a better interest rate on your loan, then you may want to consider using a co-signer.
A co-signer is someone who also signs the loan documents with you, which makes them financially responsible for the loan. As a result, it’s common for parents or grandparents to act as co-signers since most people don’t want to be financially liable for other people’s debt.
The key here is finding a co-signer with better credit than you. The better the co-signers credit, then the better financing deal you’ll end up getting for your new vehicle.
If you are considering asking someone to act as a co-signer on your loan, then you need to commit to paying the loan on time every month. If you’re late, then it shows up on the co-signers credit report and damages their credit score. If you default on the loan, then the bank will go after the co-signer to pay for it.
How Much Should You Put Down As A Down Payment?
Since cars depreciate so quickly, it’s a good idea to put down a decent sized down payment when you purchase a vehicle.
The more you can afford to put down on a car now means the cheaper your monthly auto loan payment.
Just like when you buy a home, putting down 20% is a good amount for a car down payment. You don’t have to put down this much, but it’s a good idea to do so if you can afford it now.
You might be surprised to learn that large down payments can mean a better rate on your loan. This is because the lender isn’t having to take on as much risk.
5 Tips On Buying A Car With Bad Credit
Okay, so you’ve got bad credit and you need to get yourself a new vehicle. It sucks, but you’ve gotta do it, right?
Use the tips below to prepare before you make that purchase so that you’ll have the best luck at getting a good interest rate and automotive loan term. Plus, we want you to get approved the first time!
1. Check Your Credit Reports First
Before even attempting to get a car loan, pull all your credit reports at annualcreditreport.com to see if there are any surprises lurking there. What you’re looking for are debt accounts that aren’t yours or inaccurate reporting of your debts.
If you have any past due accounts or other things you can fix, then go ahead and take care of those problems before applying for auto financing. And make sure that the data gets updated on your credit report first!
2. Save Up A Large Down Payment
Since you want to get the best financing offer available with your bad credit, do yourself a favor and try to save up a large down payment. I know this is easier said than done, but every little bit that you can squirrel away helps.
Not only does a large car down payment help you get a better interest rate, it also makes your monthly payment and lifetime loan costs cheaper.
3. Stop Applying For New Credit
Since new credit inquires stay on your credit report for two years and lower your credit score, stop applying for new credit as soon as you know that you’re going to need to get a car loan.
The earlier you can stop applying for credit, the better that is for your credit score.
4. Avoid “Buy Here, Pay Here” Lots
You may be tempted to stop by one of those car lots advertising that you can buy a car off their lot and make weekly payments on it. These car lots are best avoided as they tend to engage in predatory lending practices.
People who have used these lots often complain of high interest rates and unreliable vehicles.
You’re better off finding a lender that works with bad credit applications.
5. Don’t Buy More Car Than You Can Afford
When you get approved for a car loan with bad credit, you might get surprised with a loan amount larger than you anticipated. But you don’t have to spend up to that limit just because it’s there.
Stick with buying a car that fits in your budget so that you don’t over extend yourself and possibly end up in a worse financial situation.
Buying a new car is extra stressful when you have bad credit, but it’s not impossible.
Follow our tips above so that you can find a lender who works with bad credit. And before you know it, you’ll be driving to work in your new ride.