How to get a car loan with bad credit

If you need a car to get to work or school, opting for a used vehicle is a great way to save money. However, used cars are still an important investment. The average used car costs over $ 20,000 today, you may therefore need to take out a loan to finance your purchase.

Lenders generally want borrowers to have a credit score of 661 or higher. If your score is lower than that, they consider you to be an unsecured, subprime, or deep subprime borrower, making it more difficult, but not impossible, to obtain a loan. Here’s what you need to know.

Key points to remember

  • Your credit score is an important factor in determining whether you qualify for a car loan.
  • Auto lenders typically look for borrowers with a credit score of 661 or greater.
  • People with scores below 661 may be eligible for funding, but will likely pay much higher interest rates.
  • Some lenders specialize in loans to people with average or poor credit.
  • You may qualify for a loan and potentially get a lower rate by making a larger down payment or adding a co-signer to your loan application.

5 ways to get a car loan with bad credit

Here are five things you can do to improve your chances of getting a car loan if your credit is bad or fair.

1. Improve your credit first

Before going to buy a car, focus on improving your credit as much as possible. For example:

  • Pay your bills on their due dates. Your payment history represents 35% of your credit score. By making all of your payments on time each month, you can increase your credit score.
  • Reduce your account balances. Your credit usage, or the amount of your available credit you are using at any given time, is 30% of your credit score. You can improve your credit by paying off your credit card or loan balance.
  • Ask for higher credit limits. Call your credit card companies and ask for a higher credit limit. If you are approved for a higher limit, your credit usage will improve.
  • Dispute errors on your credit reports. Mistakes, such as payments you made on time but were flagged late, and fraudulent accounts opened in your name can damage your credit. View your credit reports for free on the official website AnnualCreditReport.com and dispute any inaccurate information with the credit bureaus. The three major credit bureaus (Equifax, Experian, and TransUnion) explain how to do this on their websites.

By following these steps, you could increase your credit score in as little as 30 days.

2. Save for a down payment

The lower your credit score, the less likely you are to get a loan large enough to finance the full price of a car (assuming you can get a loan). So it makes sense to save for a substantial down payment.

Auto industry experts often recommend a down payment equal to 20% of the car’s purchase price, although many buyers pay less than that. However, putting in even more money can help you get a loan and a lower monthly payment.

3. Look for a cheap vehicle

While you might dream of a spacious SUV with all of the latest features, it can be difficult to get a loan to repay if your credit is low.

Instead, focus on cheap vehicles that are more modest but still reliable. Opting for a smaller entry-level vehicle rather than a larger or more luxurious vehicle increases your chances of being eligible for auto financing.

4. Take the tour

Auto loan rates can vary widely, so it’s a good idea to compare several lenders before applying for a loan.

If possible, avoid requesting financing from the dealership. If you have bad to fair credit, you are probably better off getting a car loan on your own by shopping around and comparing loan terms. There are several types of lenders to consider:

  • Credit unions. As nonprofits, credit unions often have better rates and less stringent requirements for borrowers.
  • Banks. If you have a relationship with a local bank, you may be more likely to qualify for a loan than with another lender.
  • Online lenders. Many online lenders specialize in auto loans for people with less than perfect credit.
  • Buy here, pay resellers here. If you’re struggling to get loan approval elsewhere, a Buy Here, Pay Here dealer may be ready to work with you. However, expect higher interest rates on these types of loans than those of other lenders.

5. Ask a co-signer to apply with you

You can increase your chances of getting a loan by adding a co-signer to your application. You can ask a relative, relative or friend to co-sign your car loan. If they have good credit and a reliable income, you should qualify for a loan with a lower interest rate than you would find on your own. Keep in mind, however, that you will be putting them and their credit scores at risk if you are unable to make the payments.

Repay, refinance your car loan

If a lender approves you for a loan despite a bad credit rating, try to develop a repayment plan to minimize interest charges. By making additional payments, you can reduce the amount of accrued interest, save money, and pay off debt faster. As your credit score improves, you may also want to consider refinancing your car loan for a lower interest rate.


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