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Though it may seem impossible to get a loan with bad credit, the good news is—it's not. While having a good score may help you get approved for an auto loan with favorable terms, there are still options available for people with poor credit.
There's no minimum credit score required to get an auto loan, which means people with poor credit may just need to find the right lender or loan in order to get behind the wheel. In fact, Americans with scores under 670—which include consumers in the poor and fair credit tiers—have the same number of auto loans listed in their credit report on average as those with higher scores, according to Experian data.
Steps to Take Before You Apply for a Car Loan With Bad Credit
Credit scores are one of the factors lenders consider when deciding whether to approve a person for a car loan. A score is considered fair or poor if it falls below 670 on the FICO® Score☉ range, which goes from 300 to 850.
You may not be eligible for all loans with a score like this—and you might pay more for the loans you are able to get—but with proper planning and research, you should be able to find a loan that works for you. Here are five things you can do to improve your chance of getting approved, and reduce how much you'll pay to borrow:
1. Check Your Credit and Improve It if you Can
It's always a good idea to get a free copy of your credit reports and score before making a major purchase that will require a credit check. By doing so, you'll know what a lender will see when evaluating your credit.
When you check your credit well in advance, you can even give yourself the chance to make adjustments and potentially increase your scores before you submit an application. Improving your scores may help you get better terms and a lower interest rate, which should save you money over time. Here are tips for improving your credit scores:
- Pay all your bills on time. Payment history is one of the most important aspects of your credit, and keeping a spotless record one of the best ways to maintain good credit scores. If you have any past-due payments or accounts in collections, pay those accounts as well.
- Reduce your debt as much as possible. This not only puts you in a better financial position when applying for a loan, but it also improves your credit utilization ratio. Your utilization ratio is calculated by dividing your total revolving credit balances by your total credit limits. Experts recommend keeping your utilization ratio under 30%, or below 10% for the best scores.
- Take advantage of tools like Experian Boost®ø. This revolutionary free service could improve your score instantly when you use it to add utility, cellphone, streaming and other bills to your credit file.
2. Know How Much You Can Afford
When you buy a car, there are two major things you have to consider: how much you'll need as a down payment, and what the monthly cost of having the car will be. Figuring out your monthly payment—including your loan payment, insurance, gas and upkeep—is a critical first step in the car-buying process, as this will dictate how much car you can afford. The more expensive the car, the higher the down payment and monthly payment you'll need to pay.
3. Secure Your Down Payment
When you buy a car, you'll typically provide a down payment. This payment goes directly toward the purchase of your vehicle, and the remaining amount of the purchase will be financed and paid back over time. When buying a car, the more you can put down, the lower your loan amount—and monthly payment—can be. Additionally, a larger down payment reduces risk to your lender, which may help you secure a lower interest rate on your loan and save you money over time.
Coming up with a down payment isn't always easy, though, so you may consider delaying your car purchase to save for a larger one. Doing this could make you a more competitive applicant, lower the amount you owe and help you lock in a lower interest rate.
4. Get Preapproved for a Loan
Preapproval is when a lender checks your credit and financial details and tells you how much of a loan they would be willing to give you. This should give you a better idea of what you can afford, and takes some of the stress out of worrying whether you'll be approved for a certain car or not.
Once you have a preapproval letter in hand, it will not only help you understand which vehicles are in your price range, but you may be able to use a record of your preapproval to negotiate a good purchase price.
5. Shop Around for the Best Loan
After you get all your affairs in order and you're ready to apply for a loan, it's important to first do some shopping around. If you're having trouble getting approved for a loan from a conventional lender, take a look at lenders that are known for working with people that have lower credit scores. These lenders may offer loans at higher interest rates, but they help those with poor credit scores get approved.
As you search for the loan with the best terms and lowest interest rate, you may end up applying with multiple lenders. As previously mentioned, each time a lender checks your credit because you've submitted an application, a hard inquiry will be recorded in your credit reports. By applying with multiple auto lenders in the span of two weeks, however, these inquiries get grouped together into one.
Where Can I Get a Car Loan With Bad Credit?
Before you apply for a car loan, it's important to become familiar with the various borrowing options you may have. Some lenders offer loans to those with poor credit, but others may not. Knowing how each lender works beforehand could save you time and energy in the application process. Here are the most common types of auto financing:
- Captive financing: This type of financing is organized directly through the manufacturer and kept in-house. That means not only are you buying a car from a dealership, but you also finance the loan directly through them. This type of financing is not always an option with used vehicles. These loans may also be easier to get for someone with less-than-perfect credit, as captive lenders can be forgiving and have an incentive to issue you a loan to buy their car.
- Dealer-arranged financing: In this situation, the dealer works with different lenders to find and obtain a loan for your vehicle. Once you apply, you may get several loan options from which you can pick the one with the best terms. This option could be good for someone with fair credit, as your information will be shared with several lenders at once—including at least a few that should consider applicants with imperfect histories.
- Bank or credit union: Banks and credit unions may have options for financing an auto purchase. Similar to any other loan, you would simply apply with a banker and receive a preapproval that you then take to the dealership. This loan is paid back directly to your bank or credit union back on a monthly basis. This could be a good option for people who already have an established relationship with a bank or credit union, as they may overlook blemishes in your credit history and use your experience with their institution as evidence of your creditworthiness. If you can't go into a branch, you can also apply for many bank loans online by visiting bank websites and looking for auto loans.
- Online lenders: Nowadays, online banks and fintech (financial technology) companies also offer auto loans. The process when applying for these loans typically takes place all online, and interest rates can vary widely depending on the lender. To find one of these offers, you can search generally online for auto loans, looking specifically for companies that exist completely online. You can also use a single aggregation website that allows you to use one application to receive several loan offers. Just be wary of unfamiliar companies and do your research to determine whether a lender you're considering is reputable and offering a fair deal.
- "Buy here, pay here": These dealers specialize in working with people that have no credit or poor credit. Instead of sending your loan to an outside lender, they finance the purchase of the vehicles on their lot themselves. There are many downsides to this type of financing, however, including high interest rates, high down payment requirements and a potentially limited vehicle selection.
Additional Tips for Getting a Car Loan With Bad Credit
If you need a car immediately and don't have time to improve your credit scores before applying for an auto loan, here are some alternatives that might help.
- Get a cosigner. A cosigner is a person that agrees to apply for a loan with you, and is equally responsible for making loan payments. Cosigners typically have established good credit and give the lender peace of mind in situations where the primary applicant has less-than-perfect credit history. If you end up missing payments or defaulting, there will likely be credit consequences for both you and your cosigner.
- Increase your down payment. The bigger your down payment, the more likely it is you'll get approved for a car loan. Down payments not only reduce the amount you have to borrow, but having some skin in the game shows lenders that you're serious about paying off your loan.
- Choose a cheaper car. If you can't get approved for a loan, finding a less expensive car will reduce the amount you need to borrow. Even if your credit isn't good enough to land you a large auto loan, a lender may approve your application for a smaller one.
- Look into second-chance car loans. These types of loans do exactly what they say and are meant to give people with bad credit a second chance. If you have been turned down for a conventional car loan, a second-chance lender will try to provide you with finance options you're practically guaranteed to get approved for. When choosing a second-chance car loan, be careful to pick a lender that's reputable and has a track record of positive customer experiences. These loans may be available through some credit unions and even large companies like Carvana have financing options specially designed for people with poor credit. These loans will almost certainly carry high interest rates and fees, though, so consider your options carefully.
How a Car Loan Impacts Your Credit
Getting a car loan will impact your credit, and it could ultimately help or hurt your credit depending on how you handle your repayment.
First, when you apply for an auto loan (or multiple loans if you try with several lenders), a record of your application (called a hard credit inquiry) will be listed in your reports. This shows that a lender checked your credit reports as part of the application process. This record remains in a credit report for up to two years, but might not have any impact on your scores after just a few months.
Lenders often report your payment history to one or more of the three major credit bureaus. This information will remain in your credit reports for many years, so it is important to make all your payments on time.
Payment history accounts for 35% of your FICO® Score, and missing even one payment could negatively impact your scores. Too many missed payments could also result in your car getting repossessed by the lender, which has a devastating effect on your credit.
If you make all your payments on time, this positive information will be recorded in your file and will contribute to the overall health of your payment history—helping your scores over time. If you don't know what your credit score is, you can see your FICO® Score for free through Experian.