Lenders consider your creditworthiness to determine your risk as a borrower. When seeking financing for a car, having a high credit score helps you access better loan options. Those with lower credit scores, on the other hand — typically 300–579 for FICO and 300–600 for VantageScore — have demonstrated that they haven't yet learned to manage credit responsibly and are, therefore, deemed higher-risk borrowers.
Nevertheless, getting approved for a car loan with bad credit is possible. But bear in mind that it may be difficult to get favorable terms. Make sure you compare interest rates and loan terms from multiple lenders.
Why Your Credit Score Matters
Lenders consider credit scores when reviewing auto loan applications as it helps them determine how credible borrowers are when it comes to debt repayment. A person's credit score can also affect their interest rate and loan terms. The higher their credit score is, the better the loan offer.
Lenders set various eligibility requirements for borrowers. Some require a minimum credit score. Failure to meet this means you can’t qualify for that lender’s auto loan offers. That said, you may still find lenders that cater to borrowers with bad credit.
Lenders calculate interest rates based on different factors, including the length of debt repayment and the borrower’s creditworthiness. Borrowers who have bad credit scores typically get higher interest rates. To find more favorable offers, consider improving your credit score before applying for a car loan.
Since your credit score plays a crucial role in determining your interest rate, it also affects the amount you need to pay for the loan. With higher interest rates, you’ll likely have higher monthly payments.
How to Find Your Credit Score
Knowing your credit score before applying for a car loan can help you find the right lenders. You can use it to figure out if you qualify for a loan without going through the whole application process. You can get a copy of your credit report from AnnualCreditReport.com every year. There are also companies offering free credit scores.
Understanding Your Credit Score
Understanding your credit report can help you know how lenders use it to gauge your creditworthiness.
There are two types of credit scores widely used by lenders — FICO and VantageScore. Both use credit data and history to calculate scores.
FICO:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Credit Mix – 10%
- Payment History – 41%
- Depth of Credit – 20%
- Credit Utilization – 20%
- Recent Credit – 11%
- Balances – 6%
- Available Credit – 2%
Aside from your credit score, lenders also evaluate other factors. The most common considerations include:
- Income: If you’re applying for a car loan with bad credit, a high income may help you get better terms.
- Debt: Having multiple monthly payments and a high debt-to-income (DTI) ratio may result in higher interest rates or a denied application.
- Age of the vehicle: Your auto loan rate is also affected by the car you’re purchasing. Newer cars tend to have lower interest rates, while used and older cars have higher rates.
- Down payment: A large down payment may help you get better terms since you’ll need a lower loan amount. Lenders vary with regard to how they weigh various factors in their loan decisions. So there may be other factors that affect your loan terms.
Where to Get a Car Loan When You Have Bad Credit
When looking for an auto loan, it’s important to know which lenders offer the right products. Some lenders don’t accept borrowers with bad credit, while others do. Confirming whether a lender has a minimum credit requirement can save you time and money.
Here are some of the common places you need to check when trying to get a car loan with bad credit:
- Banks: Also known as traditional lenders, banks offer various loan options. If you already have a bank, you can start your search there. Ask them about auto loans and the offers you’re eligible to get. They may have better terms since you already have an established relationship with them.
- Credit unions: You may also consider credit unions, which are nonprofit institutions that offer financial services similar to banks. However, they only typically offer products to their members.
- Dealerships: Car dealerships also offer financing services to buyers. When buying a car, ask the dealership about their auto loan option. Make sure you check the terms first and compare them with other lenders.
- Online lenders: You may also find lenders online. Most of these loan providers include eligibility requirements and loan information on their websites. You may also complete the application process online.
Even with a poor credit score, there are multiple lending institutions you can choose from. Once you find the right lender, make sure you understand the loan terms to avoid unexpected fees and penalties.
Six Steps to Getting a Car Loan With Bad Credit
Lenders may have different application processes and qualification requirements. But you can start looking for an auto loan by taking the following steps.
Work on your credit score
The first thing you need to do is to check your credit score. This is a three-digit number calculated based on your credit data. It ranges from 300–850.
A poor FICO credit score is 300–579. VantageScore considers 300–499 as very poor and 500–600 as poor.
If you have bad credit, you may want to take extra steps to improve your score first. You can do this by paying your bills on time and trying to reduce your current debt load.
Shop and compare multiple lenders
Don’t take the first lender and loan offer you encounter. Comparing personalized quotes from various lenders can help you find the best possible terms and rates based on your circumstances.
You can start with your bank and/or credit union. Ask your car dealership as well. Checking out online lenders will give you more options. Some lenders also offer prequalification or pre-approval, which allows you to see an estimate of how much your total loan will be without a hard credit inquiry.
Look for the most favorable terms
Once you receive loan offers, compare the monthly payments and interest rates. Some lenders allow longer repayment terms, but you may end up paying more interest over time. Others may have shorter terms but larger monthly payments. Choose the loan with the lowest annual percentage rate (APR) over the shortest term for more manageable monthly payments.
Consider a co-signer
If you find it hard to get a car loan with bad credit, you may also consider having a co-signer. This is someone who agrees to take on the responsibility of paying the loan, interest and other penalties if you default on the loan.
Lenders will evaluate your co-signer’s creditworthiness to determine your loan terms. If your co-signer has a high credit score, you may get lower interest rates and monthly payments.
Seek other vehicle options
The vehicle you choose will also affect how much money you’ll need to borrow. Although you may already have a specific car in mind, it’s best to keep an open mind. Consider other vehicles that are more suitable for your budget. Depending on your financial situation and transportation needs, you may also consider leasing a car instead of taking out a loan.
Refuse add-ons
One way of reducing your loan amount is to refuse unnecessary add-ons. Spend only on essential factors. Think twice before buying extra features and vehicle accessories. These can wait for when you’re in a better financial position.
Check the warranties too. Some may not be as essential as you think. For instance, rust-proofing may not be as advantageous if you get a new car as opposed to a used one.
If an auto loan requires you to buy an add-on to get approved, such as after-market services, it may be best for you to look for other options.
If you find the loan offer unmanageable, you may want to wait until you improve your score. But if you need the vehicle now, there are a few steps you can take to increase your odds of getting better terms.
- Make a Bigger Down Payment: By increasing your down payment, you’re lowering the amount you need to borrow. This may also give the lender assurance that you’re committed to repaying the loan.
- Opt for a Cheaper Car: Choosing a less expensive vehicle can reduce the amount you need to borrow.
- Consider Second-Chance Car Loans: These loans are meant for borrowers with bad credit who fail to get loans from conventional lenders. However, they tend to come with fees and high interest rates. Make sure to check the lender’s reputation and credibility.
How to Boost Your Credit Score
The best way to get favorable loan terms is to improve your credit. There is no one way to do this, either. Depending on your circumstances, there are various methods you can try.
FAQs About Getting a Car Loan With Bad Credit
When it comes to buying a vehicle, your credit score plays an important role in determining your financing options. If you have a less-than-stellar credit score and aren't sure what options are available to you, learning the answers to some of the most commonly asked questions may help.
There’s no universal minimum credit score requirement. Some lenders may not accept borrowers with bad credit. Others may approve such applications but charge higher interest rates or monthly payments.
Applying for a loan can cause your credit score to dip temporarily. But it can also help improve your credit score over time with proper management. By paying your monthly dues on time, you can improve your payment history and raise your credit score. You can also opt to pay off your auto loan early or make larger monthly payments to improve your credit score faster.
Car dealerships check credit only if the buyer plans on taking out an auto loan. If you’re paying in cash, there’s no need for a car dealership to review your credit.
When applying for a loan, you may be asked to submit proof of your income. This can be a pay stub, tax return or bank statement. Aside from this, banks also consider your debt-to-income (DTI) ratio.
The minimum down payment depends on the lender. Some financing institutions require a certain percentage, while others don’t. In most cases, a 20% down payment is a good idea. Increasing your down payment will help you lower your loan amount, which, in turn, lowers your monthly payments.
There are various ways to build your credit. You can start by paying your bills on time, asking for credit limit increases on your credit cards, checking and disputing credit report errors, widening your credit mix and becoming an authorized user for a friend or relative.
Read More About Auto Loans
About Christopher Boston
sources
- myFICO. "What’s in My FICO Scores?." Accessed February 16, 2023.
- VantageScore. "The Complete Guide to Your VantageScore." Accessed February 16, 2023.
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