How to Get a Car Loan With Bad Credit

Buying a car is something every person should be able to do if they want to.

But unless you have enough cash to pay for a vehicle outright, you're going to need car financing from a lender.

What happens if your credit is less than excellent?

If you fit this category, you may be wondering whether getting a car with bad credit is even possible. You may also wonder how fast a car loan could raise your credit score.

Well, there's good news and bad news (depending on your situation). While it is possible to get a car loan with a weak credit score, there will be certain conditions you'll have to meet (or accept).

So let's dive in to see how to get a car loan with bad credit. If you want to jump to a specific section, please use the links below:

• Credit score in the 500s
• Horrible credit
• Minimum credit score for a car loan
• Qualify for bad-credit car loans
• How car loan rates are set
• Where to get a bad-credit car loan

Can I get a car loan with a credit score of 500?

Having a high credit score gives you all sorts of advantages, especially when it comes to obtaining loans. The good news is you can still get qualified (and approved) for an auto loan with a credit score of 500.

But you're probably not going to get the same terms as someone who has a 700 credit score. That's because lenders view folks with a higher credit score as having a lower credit risk. The purpose of a credit score is to tell potential lenders how well you can manage your finances.

Managing your finances well includes repaying loans, paying bills on time (no delinquent accounts), and how much of your credit you use per month (maxing out credit cards is a red flag).

So if you have a 500 credit score, then you probably have a few blemishes on your credit report (i.e., missed bill payments, outstanding balances on closed accounts, collections accounts). If that's the case, then you can expect to be offered a higher interest rate for your car loan. And you'll likely be expected to make a higher down payment to get the loan.

For example, a person with an excellent credit score may have to put down nothing on a car and have a lower interest rate of 5%. A person with a low credit score may have to pay $3,000 down and an 11% interest rate. So over time, you're going to end up paying more for a car loan due to your lower credit score.

Can you get a car loan with horrible credit?

According to an Experian report^[1], people with a credit score of 660 or higher get the best interest rates for auto financing. As of June 2020, that was around 6% for a used car and 4% for a new car. However, if you have subprime scores (between 501 and 600), then the average car-loan interest rate was 11.33% for new vehicles and 17.78% for used cars.

But how low can you go when it comes to credit scores? Can you get a car loan when you have a low credit score? The quick answer, yes. It's possible to get approved for a car loan with very bad credit.

If your score is at or below 500, then you can expect interest rates around 13.97% for new cars and 20.67% for used cars.

Let's give an example of what this looks like for a car buyer.

Using the myFICO loan savings calculator^[2], the difference in monthly payment and total interest between good credit and poor credit is significant. For this example, we entered a $20,000 60-month car loan in Texas.

The result at the time of this writing showed that someone with an excellent credit score (720-850) would pay $367/month resulting in $1,996 in total interest. On the other hand, someone with a 500-589 credit score would pay $487/month resulting in $9,246 in total interest.

What is the minimum credit score for a car loan?

The good news is there's no specific score you must have to get approved for a car loan. It all depends on the car dealership you go to, the scoring model they use (FICO®, VantageScore, etc.), and the banks you apply to. We can also look at the numbers to get a better idea of who's getting approved.

For example, in 2019, the average credit score^[3] of borrowers for a new car was 716. And the average score for borrowers of used cars was 657. The majority of borrowers (63%) had prime and super-prime scores, while 19% had subprime (501-600) and deep subprime credit scores (300-500).

So there are people with bad credit getting approved for auto loans, but they're paying the highest interest rates. Those approved for a new car loan with subprime credit paid an average of 12.42% in interest (as of 2019). And for deep subprime credit, borrowers paid an average interest rate of 14.97%.

The interest rates are even higher for used cars, which reached 17.52% for subprime borrowers and 20.24% for deep subprime borrowers.

Look on the bright side – getting a car loan with a bad credit score is definitely possible. The question you may be asking now is:

"How do I get a car loan with bad credit?" The simple answer is to find a bank, credit union, or online lender that offers car financing to subprime borrowers.

What banks approve auto loans with bad credit?

Finding a lender for your bad credit car loan may be easier today simply because there are more potential lenders to choose from, including some online options.

Roughly 34% of Americans^[4] have fair or very poor credit scores (300 to 669), so catering to this group can help car dealerships and lenders earn more revenue.

But getting approved for a bad credit auto loan may require additional fees and other requirements. For instance, you may have to:

• Put down a larger deposit amount (to reduce the risk for the lender)
• Accept a higher interest rate (adding thousands to your loan amount)
• Receive a smaller auto loan size (which means you might have to buy a cheaper, older car)

Now, if you want to improve the odds of getting approved and/or qualifying for a lower interest rate, consider the following:

• Find a cosigner with good credit to be your co-applicant
• Pay your bills on time (and catch up on late payments)
• Reduce the debt you owe (loans, credit cards, etc.)
• Dispute any errors on your credit report (check all three from Experian, Transunion, and Equifax)
• Report your rent and utility bills to credit bureaus (i.e. Self)
• Make a larger down payment on your auto loan
• Ask for a shorter repayment period (you'll pay more monthly, but you'll save money by paying off the loan faster)
• Shop around for the best rates (don't settle for the first lender)
• Refinance your auto loan later (find a lender with lower interest rates)

How your auto loan rate is determined

You may be wondering what credit score car dealers use to determine the loan rate. It's not just your credit score that determines your auto loan rate. Lenders will assess other information to determine the applicant's credit risk.

For example, lenders will look at things like:

• How long your loan term is – the longer the loan term, the higher the risk for the lender. The odds of you defaulting increase with the more payments you have to make. See our related articles about long-term car loans and whether refinancing a car can hurt your credit score.
• Down payment size – the more money you put down, the lower the lender's risk (the smaller the loan size).
• The vehicle's age – a new car is pricier, so the interest rate can be lower and still be profitable. Also, lenders must compete with auto manufacturers that offer low interest rates. Used cars don't provide any incentives to car buyers, so lenders have no reason not to tack on higher interest rates to bad-credit loans.
• Debt to income ratio – the more money you have saved and available relative to the amount you already owe, the better it looks to the lender (lower risk of default).
• Criteria of the lender – every lender has their own list of criteria borrowers must meet to be approved for a bad-credit car loan.

Next, let's look at where to get a car loan with bad credit.

Where to apply for bad credit car loans

There are different ways you can get financing for a car when you have poor credit. Here's a look at some of your available options:

• Banks and credit unions – if you have an account with one, then your odds of loan application approval are higher (especially if you have old accounts in good standing).
• Auto dealerships – some dealerships offer financing through their finance department. They'll shop your loan application around to different lenders to find the best rates. Some offer programs unique to borrowers with poor credit.
• Buy-here, pay-here dealers – you can potentially skip getting a loan with a bank or other financial institution by going to a buy-here, pay-here dealership. This arrangement allows you to make payments on used cars directly to the dealer. They're also more likely to approve you with weak credit or no credit.
• Online lenders – these websites have prequalification tools you can use to see if you can qualify for a loan before you apply. It saves you time and prevents a hard credit check on a loan you'd be denied for.
• Second-chance car loans – these are non-traditional lenders that specialize in borrowers with low credit scores. The loans come with higher interest rates and fees, but guarantee approval (when you meet income and other requirements).

Which banks offer bad credit auto loans?

Maybe you'd like to get your auto loan from a bank. This is still an option for those with bad credit, but expect to have a higher interest rate and down payment. If that doesn't bother you, then here are some banks to consider:

Capital One: Interest starts at 3.39%, terms between 36 and 48 months, and loans starting at $4,000 (can be used at various dealerships).
Carvana: Interest rates between 3.9% and 27.9%, 72-month terms, and loans between $1,000 and $85,000 (can only be used for Carvana vehicles).
RoadLoans: Interest rates between 10.2% and 27.99%, 72-month terms, and loans between $5,000 and $75,000 (partners with dealers like Chrysler, Jeep, Ram, Dodge, and Fiat).
iLendingDirect: Interest rate starting at 1.99%, terms between 24 and 48 months, and loans starting at $7,500 (requires a 560+ credit score).
Auto Credit Express: Interest rates between 3.99% and 29.99% (specializes in bad credit auto loans and requires $1,500+/mo income).
Car.Loan.com: Has varying interest rates and same-day approval (specializes in bad credit loans and markets affordable payments).
DriveTime: Has its own dealerships, offers approval in minutes, and tailors loan terms to applicant's credit.

These are just a few of the dozens of lenders you can apply with.

Get a car no matter your credit score

It doesn't matter whether you have a low credit score or no credit history – there are ways around getting a car loan with bad credit. It takes careful research to find lenders and dealers that are willing to work with you on your next car purchase.

Consider building your credit before applying to improve your odds of approval with favorable terms (lower interest and payments).

Hopefully, this guide will help you along your path to purchasing your first (or next) car!

Article Sources

1. Experian. "Automtoive Industry Insights Q2 2020"https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-q2-safm-final.pdf - Acccessed April 12, 2021
2. myFICO. "Loan savings calculator" https://www.myfico.com/credit-education/calculators/loan-savings-calculator/ - Accessed April 12, 2021
3. Experian. "State of the Automotive Finance Market" https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/q1-2019-safm-final-v2.pdf - Accessed April 12, 2021
4. BadCredit.org. "How many Americans have bad credit?" https://www.badcredit.org/how-to/how-many-americans-have-bad-credit/ - Accessed April 12, 2021

About the author

Saphia Lanier is a content writer with more than a decade of experience writing on topics relating to SaaS, marketing, SMBs, and business/personal finance. See her on Linkedin.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.