Poor credit doesn’t mean you are doomed to high-interest rates and shady loan companies. Although it’s true not all lenders will consider borrowers with less-than-great credit, there are options. But you must be willing to put in the time and shop around. Fortunately for you, we’ve done most of the legwork.
Check your credit score
You say you have poor credit, but do you know what your score is? Don’t take someone else’s word for it. Bad credit is a relative term and it pays to know what your score is and what is behind it.
If your bad credit is caused by negative items on your report, check whether the information is accurate, complete, and up-to-date. Dispute any errors with the credit bureau reporting them, which is why you should check all three bureaus. If you don’t know how or don’t have the time to clean up your credit report, consider hiring a professional company, such as Credit Saint.
If your bad credit is due to a lack of credit history, consider investing in SelfLender’s credit building loan before getting a car loan. A credit building loan can help you save money toward a car as well as improve your credit.
Unless buying a car is an absolute emergency, you’re better off building your credit score first. On average, bad credit will cost you an additional $1,374 a year in car insurance and $9,320 in car loan interest. (Source)
Check your finances
Before you head to a lender or car dealer, sit down and take an honest look at your financial situation. What monthly payments can you realistically afford? Fill in the monthly spending plan attached below. Consider your income, mortgage or rent payment, food, utilities, transportation, insurance, and other fixed expenses. You could take this opportunity to reduce your ongoing expenses, but keep it real. It’s easy to become overly optimistic about how frugal you can become when you’re trying to justify a car you can’t really afford. This is not a case of tightening your belt for a few months. The average car loan term is 5 years.
Based on your monthly budget, calculate what is the maximum monthly car payment you can afford. Don’t forget to include costs that are not included in the car’s selling price, such as car insurance, maintenance, taxes and licensing fees.
Make a down payment
Just because you can get a zero-down auto loan doesn’t mean you should. This is particularly important when your credit is not great and you don’t qualify for the lowest interest rates. Try to put down 10 or 20 percent of the car’s value as a down payment. Do you have a vehicle you can sell for cash or trade in?
Remember your car will depreciate by around 10%, the moment you drive it off the lot. After five years, you’re lucky if it’s worth 40% of what you paid for it. (Source) That doesn’t include the interest you pay on a car loan. Putting a down payment on your car will reduce the financing costs of buying a vehicle.
It’s important to check multiple lenders when shopping for a lender, particularly if your credit is not great. The range of rates offered by lenders is huge. Some lenders will offer ridiculously high rates or charge outrageous financing fees because they know many buyers with bad credit will take anything as long as they’re approved.
Apply with four or five companies. SuperMoney’s auto loan database makes applying with top lenders easy. Just make sure you do it within a 15- to 30-day period. Credit scores consider multiple inquiries for auto loans within a short time as a single inquiry. Source
Just make sure you do it within a 15- to 30-day period. Credit scores consider multiple inquiries for auto loans within a short time as a single inquiry.
Shoot for the stars
Don’t assume you can only qualify for subprime car loans. These are high interest loans marketed to borrowers with bad credit. Sure, anyone with a heartbeat can get financing at a used car dealership, but you can do better.
Cars are easier to repossess and auto loans are cheaper to process, so lenders are more willing to take a gamble and stretch eligibility requirements. Applying for loans with subprime lenders may improve your chances of approval but you’re probably selling yourself short.
Try with your credit union or bank first
Do this even if you think they are not likely to approve your application. Lenders that already have a relationship with you, such as your credit union, bank, or even your employer, are more likely to give you a loan. If you are a member of the armed forces or a veteran, apply with USAA. USAA considers applicants with all types of credit, but only does business with members of the military and their families.
Use the terms you get from your credit union or bank as a benchmark to compare the rates and terms of other lenders.
Shop for total loan cost, not monthly payments
Although it is important to have a maximum monthly loan payment in mind, never share it with lenders. Lenders are more than happy to stretch a loan’s term to 5, 6, or even 10 years to reduce the monthly payment to something you can afford. But this will increase the cost of the loan.For example, a $30,000 auto loan with a 5% APR and a 36-month term will cost $32,369 ($899 a month). Repay it in 60 months and the monthly payments drop to $566, but it will cost you $1,600 more in interest. Of course, that’s assuming the rates stay the same. The truth is lenders usually charge higher interest rates for loans with longer terms.
Increasing auto loan terms is becoming a trend as drivers spend more on their vehicles. The average new auto loan topped $30k in 2016, the highest ever. The average term also jumped to unchartered heights, 68 months. Source
Haggle, bargain, and then negotiate some more
Lenders aren’t in the habit of giving their best rate to first-time applicants, particularly when dealing with borrowers who have bad credit. They will lowball you in the hope you will accept terms without asking questions. Treat their first offer as a starting point, not a firm price. Say you’re shopping with multiple lenders and leverage your best rate with the rest.
If you’re buying a loan at a car dealership, you can use the financing of your car loan as a negotiation tactic to lower the price of the car. Even though it’s unlikely the dealership can compete with the rates you have found elsewhere, tell the salesperson that you will be needing a loan and you want them to take care of all the financing. Dealerships can make thousands of dollars on the financing of a car. So, they can afford to be more flexible when negotiating a price if they are making money off the loan.
After you’ve ground the salesperson to their bottom line, ask to see their financing terms. If they can’t beat the rates you have found elsewhere, say you have a better offer with an outside company. This strategy works best if you already have already been guaranteed a loan with another lender.
Find a cosigner
If your credit is awful (below 600), finding a friend or relative with excellent credit (750+) and willing to cosign your loan may be the only way to avoid high interest rates. The problem is most lenders who target borrowers with bad credit don’t allow cosigners. OneMain and Mariner Finance are two exceptions. LightStream is another lender that accepts cosigners, but they only consider borrowers with good or excellent credit.
Find out the best rate available to you by completing SuperMoney’s loan offer engine. It only takes a couple minutes; it won’t hurt your credit score, and you get to compare prequalified offers from multiple vetted lenders.
FAQ on Bad Credit Auto Loans
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.
What is the minimum credit score needed to buy a car without a cosigner?
Most lenders require that applicants have been on their jobs for at least a year to be considered for approval. Lenders usually require a minimum FICO score. For many lenders, this minimum is a credit score of at least 520.
Can I qualify for a 0 down on a car loan?
In general, you’ll need a FICO score of at least 700 to qualify. Additionally, you’ll need to be paying a good price for the vehicle in question—at or below the Kelley Blue Book value or the equivalent.
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.