Buying a new or used car can be a trying experience under the best of conditions. High-pressure sales tactics and confusing pricing are par for the course. But for consumers with bad credit, car buying can become an exercise in frustration. The great deals touted in TV commercials like 0 percent APR, large cash back bonuses or free payments for one, two or three months are not available for so-called subprime car buyers.
On the other hand, car loans are for relatively small amounts of money and are secured by the cars themselves. As a result, even consumers with very poor credit are able to find financing for cars, often for much better terms than they expected. The key is to maintain a wary eye for scams while shopping around to obtain the best deal possible from among legitimate financing options. The three lenders below – each with an A+ rating from the Better Business Bureau – represent some of the best alternatives available for car buyers with less than perfect credit.
Clearlane by Ally
Clearlane provides financing for new and used cars as well as car loan refinancing for borrowers with a broad range of FICO scores. Working with a network of credit unions and national lenders, Clearlane operates as an intermediary to obtain the best possible lending terms for borrowers. Customers are initially matched online and guided through the lending process by staff members online and by phone.
Innovative Funding Services
Innovative Funding Services earns its name, working to obtain auto loans and financing for customers with FICO scores ranging from 550 to 800+. Along with financing for purchasing or leasing new and used cars, Innovative Funding Services provides loans for auto loan refinancing and lease purchase financing. After completing a five-minute online application, customers are directed to national call center finance advisors to complete the financing process.
For active duty military personnel, veterans and their families, USAA represents one of the best options for auto loan financing – either for purchasing vehicles or refinancing the set of wheels already in their clients’ garages. A pioneer of direct marketing, USAA has more than 10 million members. USAA conducts the bulk of its auto loan business by phone or over the Internet, with transactions conducted by USAA employees.
Avoiding Scams and Getting the Best Deals
It’s true that car buyers with less than perfect credit should be prepared to pay higher interest rates and expect to receive few or no perks extended to purchasers with 800+ FICO scores. But that doesn’t mean subprime car buyers must settle for being gouged or getting stuck with lemons. It certainly doesn’t mean being taken in by a scam.
Yo-yo loans are among the most common car buying scams. With yo-yo loans, desperate buyers with poor credit are thrilled by being allowed to take possession of cars, even though financing is not yet final. After several days or weeks, the dealer calls to inform the buyer that financing has fallen through and that buyers must accept much less favorable financing terms to avoid having their cars repossessed. The key to avoiding this scam is to obtain financing before going to the dealer. Barring that, car buyers should never take possession of a car without having signed paperwork in hand.
Subprime car buyers are frequently drawn into so-called “Buy Here, Pay Here lots (BHPH financing). Such dealerships are often filled with overpriced castoffs with interest rates exceeding 20 percent and should be avoided. Before purchasing any car sold “as is,” purchasers should obtain a car history from CARFAX or a similar provider.
Subprime car buyers should also be wary of expensive add-ons such as extended warranties – they aren’t necessary and can jack up the cost of cars considerably. Finally, car buyers should run – not walk – in the opposite direction away from any dealer that refuses to accept pre-approved financing.
FAQ on Auto Loans for Bad Credit
Where to get a car loan with bad credit?
Whether you have no credit history or you have made some mistakes in the past, having a bad credit score can make it difficult to shop for a car loan. However, many banks offer auto loans to people with bad credit. Start by asking your local bank or credit union where you keep your checking and/or savings account to see if they can help you with an auto loan.
Can I get a car loan with bad credit and no money down?
No down payment can end up costing you more in the long run. Subprime lenders typically ask for at least $1,000 down or 10 percent of the vehicle’s selling price, whichever is less. You can also trade in your old car and use the equity as a down payment on your new car. Even so, a down payment is something that works to your advantage if you have bad credit.
How much should you put down on a car with bad credit?
If you have bad credit, poor credit, or even no credit you should expect to have a minimum down payment of 10% or $1,000 down for your car, whichever is higher. If you’re trying to get a high risk auto loan you may even have to have a higher down payment, closer to 20% of the sale price.
How can I get a car with bad credit and no cosigner?
For some, their only option for buying a car with bad credit and no cosigner is to wait. Take some time to work on improving your credit before applying for a car loan to give you a better chance at an approval. You can work on establishing a strong payment history with a credit card or two.
Is it easier to finance a new or used car with bad credit?
Arranging a new car loan is easier than financing the purchase of a used car because there is a more concrete valuation on a new car versus an old car. If the lender cannot determine the actual cash value of the vehicle, it is very difficult for that lender to mitigate the risk of the loan.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.