Bad Credit Car Loans

Your credit score and history affect the loan and interest rate you can get when purchasing a car. Generally speaking, the better your credit score and history, the better your options. When you are considered “low risk”, lenders—such as banks, dealerships and credit unions—trust you.

But what if you have a low credit score? Fear not; your chances at securing an auto loan are not completely hopeless.

Read on for advice about why credit matters, other factors lenders consider, and how to make your financial situation work despite the possibility of high-interest rates. (And don’t forget to take a close look at our tips about how to increase your credit score along the way!)

Who Is This Guide For?

The following are profiles of people at risk for low credit. They may be more relatable than you’d think.

Why Credit Matters When Getting a Car Loan

Your credit score will determine how much money you can borrow and at what interest rate. Why? It gives lenders an insight into the history of how you manage your debts.

“Think about it this way: credit is short for ‘credibility,’” said Charles Cannon, manager at a BMW dealership in Houston, TX. “It gives a lender a snapshot of your ability to pay people back in a timely manner and [whether] you are purchasing more car than you can afford.”

Other Factors Lenders Look At

Steps to Getting an Auto Loan with Bad Credit

High or low credit, the first thing you need to do when getting an auto loan is set an overall cost and monthly budget. Then check your credit report for errors, shop around and apply for auto loans, get pre-approved, find a car, and compare loan terms before finalization.

If you indeed happen to have a lower credit score, follow these additional steps to get the best possible loan:

Step 1

Pay down your debt

Before applying for a car loan, lower your debt-to-income ratio (DTI). Start with your credit cards.

Step 2

Compare multiple lenders

Consider the pros and cons of each lender:

Banks have competitive rates and personal knowledge of their customers, but conservative policies that deter those with lower scores from finding a good deal. Credit unions offer lower rates, but some may require membership and fees. Online lenders also have competitive rates, but prove difficult when it comes to communication and/or transfer of personal information. Dealerships are oftentimes connected through a bank; they offer loans to those with lower scores, but they may increase pricing for a profit.

Step 3

Choose a short-term loan

With bad credit, your interest rates are already higher. Find a short-term loan with lower rates. They are designed to help you pay off your debt faster, even though monthly payments are higher. If you can, shoot for a 24-36 month loan.

Step 4

Should you get a co-signer?

They will be liable for any failed debt payments, so a co-signer should be a trusted family member or friend with a high credit score. For example, young adults often co-sign with their parents.

If your credit is low enough for you to be considered high risk or you do not meet lender requirements alone, you may have no other choice.

Step 5

Be open about vehicle type

As we learned, newer vehicles have lower interest rates. If you cannot afford a newer model, it may be best to wait and save up money until you can. Otherwise, don’t be too picky about the car you purchase—an older, used model will get you around just the same!

Step 6

Refuses add-ons

Add-ons are extra services that the dealership offers. They are often presented to customers in a packaged “deal”. These offers include extended warranties, theft protection, insurance—even things like fabric protection. Be careful, as these are ways for dealers to make an extra profit or increase interest.

Where to Get a Car Loan When You Have Bad Credit

Making It Work with a High Interest Rate

What happens when you have low credit and cannot avoid a high interest rate, but need a car? Follow these tips and you won’t default:

Transportation Alternatives

If your credit score is so low that your interest rate is unmanageable, or you feel the only vehicle you can afford is unsafe, wait a few months or a year to see if you can improve your score and qualify for something better. In the meantime, look for a reliable, temporary alternative. An added bonus? These options reduce your carbon footprint and can save you money!

PUBLIC TRANSPORTATION

Do you live near a bus, tram, or rapid transit? Depending on how far and how many modes you’ll be using, it only takes between $3-$25 a day. The American Public Transport Association claims that a family can save between $6,000-$10,000 each year by using public transportation. Remember that monthly passes are available, as well as student, senior citizen, and disability discounts.

BIKES AND BIKE-SHARING

If you live close enough to your places of work and recreation, consider dusting off the old bike! It’s both a money saver and a form of exercise. Bike-share systems are also becoming popular in towns and cities. All it takes is a small fee to rent and return to a public bike rack. Some mobile mapping apps now show where these racks are located.

CAR SHARING

Similar to bike-sharing, companies like Zipcar allow members to use a car without having to worry about car payments, insurance, car maintenance or the cost of gas—and at a low cost of $7 per month. Companies like Zipcar also offer university discounts for students and teachers. If planning to use it less often, you can simply pay for the number of hours you need the car.

TAXIS AND RIDESHARE APPS

In the city, you have access to public transportation, as well as city taxis. However, if you need to get somewhere public transportation doesn’t reach, or you live in a non-urban area, you may need to use convenient mobile rideshare services like Uber and Lyft. Keep both taxis and rideshares in mind because pricing depends on where you are and where you are going. Additionally, stay on the lookout for rideshare promos for new users or regular riders because Uber and Lyft charge a premium during peak hours. Of course, using these services regularly can add up, so don’t rely solely on these options.

CARPOOL

On each app, Uber and Lyft also offer carpool options—uberPOOL and Lyft Line, respectively—as a cheaper alternative. Or you can go old-school: If you need a way to get to work, can a coworker give you a lift if you chip in for gas money? This should be way more affordable than a high-interest car payment and maybe even public transportation.

MOVE

It’s a big lifestyle change, but it’s something you might need to consider. If the reason you are shopping for a car is due to distance, remember that all the options above may be available to you at a cheaper price if you moved closer to where you need to be.