The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Depending on your credit score, your interest rate when buying a car can vary. Based on the average car loan interest rates by credit score, you can save over 15 percent on interest by improving your credit. Buying a car with bad credit is possible, but it’s challenging. In addition to finding a car you like at the right price point, you have to consider approval for a car loan. You may be wondering if you can qualify for any loan with bad credit.
In this post, you will learn everything you need to know about car loans for bad credit and 11 tips to make the process a bit easier.
Before applying for a loan, get a free copy of your credit report and check the information for fairness and accuracy. You’ll have to check your credit score separately, since it won’t appear on your credit report. This way, you can see where your credit lies on the spectrum from excellent to poor.
This gives you a better understanding of your credit score range and what loans are best for your credit profile. Each application triggers a hard inquiry on your credit report, which temporarily lowers your score, so knowing your credit score can prevent you from applying if your chances of getting approved are low.
One of the primary reasons why getting a car with bad credit is difficult is that when a financial institution issues a loan, they’re taking on risk. When the loan amount is higher, the bank is taking on more risk, so saving up for a larger down payment helps lower the total amount you need to borrow. This can help increase your chances of getting approved for the loan, and it can also lower your monthly payments and the interest rate.
To help improve your chances of getting approved for an auto loan, start planning a few months or even a year in advance. You may have a better chance of qualifying for an auto loan and a better interest rate by cleaning up your credit.
Take proactive steps to improve your credit:
If you have a negative payment history, try to build up a positive credit history to counterbalance it. Make sure your credit report fairly represents you so your credit score is based on accurate information. If you have a high credit utilization ratio, paying down balances on your revolving accounts can also help.
One of the ways you can avoid some of those common auto loan mistakes is by doing your research before beginning the process. The next step is to figure out what you can afford by creating or updating your budget.
Factor in the monthly amount and interest rate, and see what balance you would have left each month. After calculating what monthly loan amount you can afford, this will help you narrow down a car in your price range.
When creating your budget, some items to keep in mind include:
It’s also helpful to have money in savings for an emergency fund. Cars need regular maintenance and sometimes need repairs, so consider this before deciding on the monthly payment you can afford.
In addition to researching the type of vehicle, it’s helpful to research the various types of lenders. While there are bad credit auto loans, some are better than others. Before applying for a car loan, compare different lenders and interest rates to see what you may qualify for. There are alternative options for people with bad credit.
Dealerships often have relationships with banks and will try to help you get the best deal possible. “Buy here, pay here” financing is essentially a one-stop shop process. The dealership where you buy your car will also arrange the loan, and you’ll pay them directly.
Second-chance car loans are designed specifically for people with bad credit, also referred to as subprime car loans. This is helpful as a second option if a regular lender declines you.
Some dealerships may finance the loan themselves or work with subprime borrowers. While these loans will have higher interest rates and fees, you have a better chance of getting approved.
When financing a car with bad credit, it doesn’t hurt to shop around. Before applying, look online for the latest average auto loan rates. The loan rate will affect your monthly payment and the total price of the car you can buy.
ou’ll see the term annual percentage rate (APR), which refers to a loan’s yearly interest rate. The interest rate you receive is important because a car can cost you thousands of dollars more if the interest rate is too high. For example, let’s say you’re going to buy a car for $20,000. With a 60-month loan at 7 percent interest, the total cost of the car is $23,761.44. That same car at a 15 percent interest rate is $28,547.92—almost $5,000 more. The monthly payments are roughly $75 per month as well.
You can get approved for a car loan if you meet certain criteria by getting preapproved by a bank or credit union. Preapproval allows you to save time and can help you avoid a hard credit check.
The bank or credit union may look at these factors to determine if you qualify for a loan:
This will also help you determine the amount you’ll qualify for. By taking this step early in the loan process, you can save time and avoid any potential hurdles.
As you go through this process, it’s helpful to beware of subprime lenders. Subprime lenders may seem like a great option when trying to figure out how to get a car loan with bad credit, but they’re often predatory. Subprime lenders market to people with poor credit and advertise an easy and stress-free process, but they often have some of the highest interest rates. One report shows that subprime loan interest rates are sometimes as high as 17 – 22 percent.
In addition to shopping around for lenders of poor-credit car loans, it’s also advantageous to shop around for vehicles. Different dealerships have different prices, and some even offer vehicle discounts and rebates. Remember, the total price of the vehicle is a prime factor when it comes to whether or not you can get approved for a loan, and it’s also a factor when it comes to your monthly payments and interest rate.
If you’re looking for cars for bad credit, something to take into consideration is getting a cosigner for the loan. A cosigner can help you increase your chances of getting approved for the loan because the cosigner is taking on some of the risk.
When you get a cosigner for your loan application, you’re “piggybacking” off their good credit. This person is typically a friend or a family member, and the lender will consider their credit score, which can help save you on interest while also increasing your odds of approval.
Should you get a cosigner, it’s important to remember that both of you can be affected by the loan. If you miss any payments, it can harm both your credit and the cosigner’s credit, but by making your payments on time, both of your scores can increase due to a good payment history.
Whether you’re trying to get a new or a used car with bad credit, be mindful of potential add-ons when you’re purchasing the vehicle. The salesperson or the financing department may offer add-ons like an extended warranty on the vehicle and maintenance packages. Each of these comes with an additional cost, which lenders typically divide over the term of your loan and add to your monthly payment. These can quickly put you over the budget you gave yourself for monthly car payments.
Not all add-ons are bad, and some may be a good deal. For example, an extended warranty on a used car may be a good idea for some people if it fits within their budget. While researching lenders and car dealerships, keep this in mind and see if you can find pricing so you’re more prepared when you get the vehicle.
A car loan can affect your credit positively or negatively—it all depends on how you repay.
Consistent and on-time car payments will be recorded and added to your payment history, which accounts for 35 percent of your FICO® score. Over time, it will improve the overall health of your payment history and your credit.
If you miss too many payments, it could result in the lender repossessing your car. So when you qualify for a car loan but have a high interest rate, you can continue building your credit, and then you can look at refinancing your car loan for a better interest rate once you’ve made on-time payments for about a year or so. This can also save you money.
To learn more about how you can work on your credit to prepare for a car loan application, take a look at Lexington Law’s services today.