Having bad credit doesn’t mean you can’t get approved for a car loan, but it does mean you’ll need to take extra steps to improve your chances and find the best possible deal. With careful planning and research, you can secure financing for a vehicle even with a low credit score.
This guide offers practical tips for getting approved for a car loan with bad credit while minimizing costs.
How Bad Credit Affects Car Loans
Credit Score and Car Loan Rates
Your credit score determines the interest rate and terms you’ll qualify for. A lower score often means:
- Higher interest rates.
- Larger down payment requirements.
- Shorter loan terms.
| Credit Tier | Score Range | Typical APR (New Cars) | Typical APR (Used Cars) |
|---|---|---|---|
| Super Prime | 781–850 | 3.84% | 4.15% |
| Prime | 661–780 | 4.90% | 5.47% |
| Non-Prime | 601–660 | 7.25% | 9.81% |
| Subprime | 501–600 | 11.03% | 16.65% |
| Deep Subprime | 300–500 | 14.08% or higher | 20.45% or higher |
Key Takeaway: Improving your credit score, even slightly, can significantly reduce your loan costs.
Tips for Getting Approved for a Car Loan with Bad Credit
1. Check Your Credit Report and Fix Errors
Errors on your credit report can drag your score down unnecessarily.
Action Steps:
- Request free credit reports from AnnualCreditReport.com.
- Review for inaccuracies like incorrect balances or unauthorized accounts.
- Dispute errors with the credit bureau to improve your score quickly.
2. Save for a Larger Down Payment
A larger down payment reduces the amount you need to borrow and shows lenders you’re serious.
Benefits of a Larger Down Payment:
- Lowers the loan-to-value (LTV) ratio.
- Reduces monthly payments and interest costs.
- May help you qualify for a loan despite bad credit.
Tip: Aim for at least 10%–20% of the car’s purchase price.
3. Get a Co-Signer
A co-signer with a strong credit profile can help you secure better loan terms.
How It Works:
- The co-signer agrees to take responsibility for the loan if you default.
- Their credit score and income improve your chances of approval and may lower your interest rate.
Caution: Ensure your co-signer understands the risks involved.
4. Shop Around for Lenders
Different lenders have varying criteria for approving bad-credit borrowers.
Where to Look:
- Banks: Offer loans for existing customers, but may require higher scores.
- Credit Unions: More flexible and often have lower rates for members.
- Online Lenders: Specialize in bad-credit loans with quick approval.
- Dealership Financing: May offer financing for subprime borrowers, but rates can be high.
Tip: Prequalify with multiple lenders to compare rates and terms without affecting your credit score.
5. Consider a Cheaper Car
Choosing a less expensive vehicle lowers the loan amount, making approval easier and reducing total costs.
Example:
- Loan Amount: $20,000 vs. $15,000.
- Interest Rate: 12%.
- Term: 60 months.
| Loan Amount | Monthly Payment | Total Interest Paid |
|---|---|---|
| $20,000 | $444 | $6,640 |
| $15,000 | $333 | $4,980 |
Savings: $111/month and $1,660 in interest.
6. Improve Your Credit Before Applying
If possible, take steps to boost your credit score before applying for a loan.
Quick Fixes:
- Pay Down Credit Card Balances: Lower credit utilization to below 30%.
- Catch Up on Late Payments: Bring delinquent accounts current.
- Avoid New Inquiries: Don’t apply for new credit in the months leading up to your loan application.
7. Choose a Shorter Loan Term
While longer terms reduce monthly payments, shorter terms may improve your chances of approval and save you money on interest.
Example:
- Loan Amount: $15,000
- Interest Rate: 12%
| Loan Term | Monthly Payment | Total Interest Paid |
|---|---|---|
| 36 months | $498 | $2,928 |
| 60 months | $333 | $4,980 |
Tip: Opt for the shortest term you can afford.
8. Avoid “Buy Here, Pay Here” Lots
While these dealerships specialize in bad-credit loans, they often charge extremely high interest rates and may include hidden fees.
Risks of Buy Here, Pay Here:
- APRs often exceed 20%.
- Limited vehicle selection.
- Higher likelihood of default due to unfavorable terms.
Tip: Exhaust other financing options before considering this route.
9. Add a Trade-In Vehicle
Using your current car as a trade-in can reduce the loan amount and improve your chances of approval.
Example:
- Car Price: $20,000
- Trade-In Value: $5,000
- Loan Amount: $15,000
Result: Lower loan amount = easier approval and reduced total costs.
10. Negotiate the Loan Terms
Don’t accept the first loan offer. Ask lenders to:
- Lower the interest rate.
- Waive or reduce fees.
- Offer better repayment terms.
Example Scenario: Bad Credit Car Loan with Smart Planning
Initial Loan Offer:
- Loan Amount: $20,000
- Interest Rate: 15%
- Term: 60 months
- Monthly Payment: $475
- Total Interest: $8,500
After Taking Steps:
- Improved Credit Score: Increased from 580 to 620.
- Larger Down Payment: $4,000 down payment.
- New Loan Offer:
| Loan Amount | Interest Rate | Term | Monthly Payment | Total Interest Paid |
|---|---|---|---|---|
| $16,000 | 10% | 48 months | $406 | $3,488 |
Savings: $69/month and $5,012 in total interest.
Conclusion
Getting a car loan with bad credit requires extra effort, but it’s possible to secure financing and minimize costs. By improving your credit, saving for a down payment, and shopping around for lenders, you can find a loan that fits your budget and needs.
Take your time, explore all options, and use the tips in this guide to make a financially sound decision and drive away with confidence.