If you need a car to get to work or school, choosing a used vehicle is a great way to save money. However, used cars are still a big investment. The average used car costs over $ 27,000 in November 2021, therefore, you may 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 is 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 you go out and 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 as overdue and fraudulent accounts opened in your name, can damage your credit. View your free credit reports at 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 that is 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 pay off 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.
Dealers are often happy to find financing for you because they take a commission on top of the lender’s rate, sometimes up to 4%.
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.
In addition to potentially finding better rates than in dealerships, obtaining financing yourself opens the door to private sales and auto auctions. With a variety of sales aggregation sites such as Cars.com, Edmunds.com, or Autotempest.com, buyers can find people who can have better prices on vehicles without the overhead costs of a dealership. Facebook Marketplace has also become an automotive sales platform, especially for private sales.
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 having trouble getting 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 from 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 having a bad credit rating, try to develop a repayment plan to minimize interest charges. Check your loan agreement to see if prepayment is an option. By making additional payments, you can reduce the amount of accrued interest, save money, and pay off debt faster.
Making regular, on-time payments on a car loan can help boost your credit score. As your credit rating improves, you may also want to consider refinancing your car loan for a lower interest rate. With a higher credit score, you will find more attractive rates available.
Auto credit score and loan faqs
Can I get a car with a credit score of less than 500?
Yes, but it can take some work. There are lenders that cater for people with bad or no credit, but they offer extremely high interest rates and fees. A “second chance” car loan, also known as a subprime car loan, might be your best option. These lenders specialize in those with extremely low credit scores, bankruptcies, or repossessions on their credit report.
Many established banks offer second chance loans, which can result in higher interest rates. You can also find subprime auto loans at “Buy Here, Pay Here” dealerships, where payments are made directly at the dealership.
Can you create credit by financing a car?
Yes and no. Financing a car can increase your credit over time, but it can initially reduce your credit because you have incurred that new debt. The way to build credit when you finance a car is to make your payments on time. If you can’t, financing a car will hurt your credit.
Can you finance a car if you don’t have credit?
Having no credit will present the potential buyer with many of the same challenges as someone with poor credit. Your best options are to find a co-signer with established credit, increase your down payment, or see if you qualify for special loan programs.
Will dealers limit my car selection if I have bad credit?
Very probably. According to used car dealership DriveTime.com, it’s not uncommon to hear stories of people with bad credit being shown a different selection of cars than other buyers. Ask the dealership in advance if you will have any vehicle restrictions and what type of car you can expect.
The bottom line
A suboptimal credit score will certainly make it more difficult, but not impossible, to obtain a car loan. The steps to obtain financing for this purchase are similar to those for any other purchase. Calculate your budget. Do the work to find out your credit score. If there are any errors on your score, correct them. Make the biggest down payment you can manage. This benefits you in two ways: It can help convince lenders that you are committed to paying on time. This larger down payment also means a smaller loan amount, which means less interest on the loan. Choose an affordable car. Apply to multiple lenders.
Typically, lenders want borrowers to have a credit score of 661 or higher. If your score is lower than that, you are considered a non-prime, subprime, or deep subprime borrower, and you will need to work more diligently to build credit and secure the loan.