Can You Buy a Car with Bad Credit?
When it comes to buying a new car, many people rely on auto loans. They allow you to purchase a vehicle that may be more expensive by making monthly payments for a pre-determined period of time.
This means that, even if you don’t have the cash on hand to pay the full price for your dream car upfront, you can still buy it as long as you know you’ll be making enough money to afford it in the future. This is particularly important now, as new car prices are particularly high.
Before offering an auto loan, lenders and dealerships may check your credit score. For the lender, this is a way to ensure that anyone they offer a loan to has the capacity to pay that loan back.
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If a potential buyer has a high credit score, that indicates that the lender is taking on little risk by offering them a loan, because they have a history of making good on their credit. The better your credit score, the better loan deals you may be able to enjoy.
So, what about individuals with less than optimal credit scores? Can you get a car loan with bad credit? Luckily, the answer is yes.
If you have a bad credit score, that does not mean you’re out of the running for an auto loan, it just means that it may be more challenging or expensive for you to find a deal that fits your needs. This is because auto lenders are taking on more risk by offering individuals with low credit scores a loan.
To make it worth their while, they often require higher interest rates on monthly payments. This means, while you can buy a car with bad credit, you may want to carefully consider whether the extra costs are worth your while before you do so.
How To Get a Car Loan If Your Credit Is Bad
If you suspect you have bad credit but you still need to buy a car, there are some useful steps you can follow to find a lender deal that works for you.
Perform a Credit Check
In order to plan effectively for your car purchase, you’ll need to check your credit to determine your exact score. To do this, you can use one of the many credit check options available to consumers. These include:
Credit bureaus: Credit bureaus like Equifax, Experain, or TransUnion can help customers check their credit score for a fee.Credit score service websites: Some websites, like annualcreditreport.com, allow you to request one free credit report per year from each credit bureau.
Checking your score can allow you to set accurate expectations and see what else you might need to do to prepare for your purchase. While you’re at it, take the opportunity to check your credit reports for any inaccuracies or mistakes.
These can hurt your credit score through no fault of your own, so if you find one, it’s important to dispute the error and get it cleared.
Find Out Your Interest Rate
Once you find out your score, you can compare it with the popular 300-850 range from FICO and find out how high your interest rate is likely to be based on what you find.
If your score is near the top of the spectrum, between 781 and 850, for example, you are likely to benefit from the lowest possible interest rates. In some cases, you may even find opportunities to buy a car with 0% APR loans, or interest-free car loans.
If your score is closer to the bottom of the spectrum, particularly if it falls into the 300-500 range, you may find yourself facing much higher APR interest rates, some as high as 12% or even 20%. If your score falls in the middle, you’re likely to experience interest rates of between 4% and 10%.
Gather Other Finance Documentation
Luckily, many lenders will consider more than just your credit score. This means that if you have a less-than-perfect credit score, you can still show lenders that you’re likely to pay back the loan by providing other relevant financial documentation. This evidence may include:
Proof of previous loan repayment: If you can show a lender a history of loans, especially car loans, that you have been able to pay off successfully, it may help them see you as a reliable customer. This can help encourage them to offer you a better deal on your loan.Employment history: A stable employment history can demonstrate your reliability and help establish a steady financial situation. Monthly income: Even if your credit score is low, you can help convince lenders that you have the ability to pay back the loan by showing them your monthly income. Be sure to include all your income sources, including income from a primary job, secondary jobs, freelance work, disability payments, Social Security benefits, or child support. Debt-to-income ratio: You can calculate your debt-to-income ratio by dividing your monthly debt obligations by the gross amount of money you make in that same month. If your ratio is under 50%, lenders may see you as a better candidate for an auto loan.
It’s a good idea to gather this documentation together early in your shopping process, so you have it ready to share with lenders if they ask. You can even ask them if they’d like to see it if you notice they are hesitant to grant you the car loan.
If your documentation shows a negative credit experience, like a repossession or late loan payments, be prepared to explain the circumstances to help the lender understand why that happened and why it’s unlikely to happen again.
Set a Budget
Once you know your credit score and have predicted your interest rate, you can set a budget for your new purchase. Consider setting limits for yourself on how high your monthly payments can be and how many months you’ll consider paying them.
This can be a very helpful tool when you enter negotiations because you’ll go in knowing exactly what line you don’t want to cross financially. Remember that the longer your payment term, the more interest you might have to pay.
As you consider how much you can reasonably pay in monthly payments, you can also consider the day-to-day costs of car ownership and factor them into your budget. For example, consider:
Gas paymentsRegular maintenance feesParking expensesInsurance
Consider a Down Payment
A down payment is a percentage of the car’s price that you pay upfront. Some lenders require down payments, particularly from buyers with bad credit. Even if they don’t require it, you might still consider offering a down payment as part of the deal.
If your credit scores are low, making a down payment can help lenders see that you’re serious about the purchase and that you have the funds to support your financing plan.
This may make them more likely to give you a reasonable deal on an auto loan, as having a down payment on the table reduces the risk that the lender is taking on by offering the loan.
As a bonus, every dollar that you spend on the down payment is one dollar less that you’ll need to pay back in car loans. This means you may end up paying less overall by avoiding interest.
Research Lender Options
The final step to prepare yourself to get a car loan with bad credit is to research different lender options. This way, you can find the best deal to match your financial situation.
You can look on lender or dealership websites to learn more about their credit score requirements and the accompanying interest options. If you can’t find the information you need online, consider calling to ask.
By gathering this information before you go in person to negotiate for a car can help you pick the perfect lender and empower you to advocate for the best deal possible, using the information you learn.
What Is the Lowest Your Credit Score Can Be to Get an Auto Loan?
There is no specific cutoff that dictates whether you’ll qualify for an auto loan. This is because different dealerships and lenders are likely to have differing credit requirements and policies. However, if you know your credit score, you can do some research to determine common lender policies and interest rates.
Can You Get a Car Loan with a 500 Credit Score?
You can get a car loan with a credit score of 500, but it may result in a much higher interest rate. You are likely to pay between 10-15% in interest, and you may even pay as much as 20% in some situations.
Consider showing the lender some other financial documentation to demonstrate your reliability and your ability to pay them back. This might help them feel that more comfortable offering you a car loan, which can help bring down your interest rates.
Can You Finance a Car with a 300 Credit Score?
If your interest rate is high with a credit score of 500, the one you’ll encounter with a credit score of 300 is even higher. A credit score of 300 may reflect serious challenges in your credit history.
The high interest rate reflects the risk the lender is taking on by offering you a deal. While it’s still possible to be approved with a credit score of 300, you may need to work with a co-signer or offer other assurances of your financial stability.
A Guide To Shopping For Car Loans With Bad Credit
Finding a new car can be an overwhelming process, especially if you’re attempting it with limitations like a low credit score. It can be helpful to break the process down into manageable steps that you can cross off one at a time.
Look For Multiple Lender Options
While you might face more limited options than individuals with a high credit score, resist the temptation to jump at the first lender that agrees to work with you. If you commit to a lender too early, you might miss out on a better deal elsewhere. Instead, start by searching for options online.
You can consider credit unions, banks, car dealerships, and trustworthy online lenders. To make the process easier, you can focus your research on auto lenders that advertise low credit score requirements. You may even find some that don’t have any minimum credit requirements.
Research The Options You Find
Next, you can start investigating these opportunities by reading about their offerings online. You can do your research on the company website or a third-party comparison website, which might offer you a less biased depiction of the deals available.
If you have questions about any of the offerings, give the lender a call so you can better understand your options. It may also be helpful to call with the car you’d like to purchase in mind, as it might influence the interest rates.
It can also be a good idea to be wary when taking out car loans and read online reviews for each lender to ensure that other customers have had positive experiences. You can read positive reviews and look for individuals with a similar situation to your own.
If they had a positive experience with the lender, you might too. You can also read through negative reviews to see why previous customers may be unhappy. If you read a lot of negative reviews with the same complaints, that might be a sign to move on to a different lender option.
Pre-Qualify With Your Favorite Lenders
Some lenders might offer pre-qualification, which allows you to get approved for a car loan online before ever visiting a dealership in person. This process may involve the lender running a soft credit inquiry and an initial loan deal, including the loan amount and the interest rate.
A loan pre-qualification does not commit you to going through with the deal, so it can be useful to seek pre-qualification from multiple lenders. That way, if a lender or dealership tries to make you think they are your only option, you can easily prove them wrong.
Popular Lenders For Bad Credit
Picking the right lender to work with is an important step in any auto loan process. Consider researching different popular lenders, and focusing on those with a reputation for working successfully with customers who have bad credit.
Carvana
Carvana offers affordable new and used cars along with financing options. This means they can function as a lender and dealer, making Carvana a useful option for those hoping to speed up the car loan and purchasing processes.
If you have bad credit, Carvana may still offer you a loan as long as you have a score of 450 or higher and an income of at least $4,000 per year. They also require that you are over 18 years old and that you are not in the middle of a bankruptcy.
Consumers Credit Union
If you’re interested in working with a lender independently, then taking your pre-approved loan with you to a dealership or car seller, Consumers Credit Union is a great option.
This credit union has no maximum on car loan amounts, so as long as you’re careful with your financing, you can rest assured that you’ll be able to get the cash you need.
New Roads
New Roads can be a good option for those with bad credit because it does not require a down payment on cars. You can also enjoy relatively low interest rates and special interest rate discounts.
Once you get a New Roads pre-approval, you can take it to your chosen dealership. They are known for working with customers who have bad credit, customers who have yet to establish a credit history, and customers with past bankruptcies.
RoadLoans
Like New Roads, RoadLoans is a great option for individuals who have a history of bankruptcies. As long as the bankruptcy is no longer active, RoadLoans will still work with you on a new or used car loan offer. They also specialize in subprime auto loans, or auto loans for individuals with bad credit.
Compare Lenders To Find a Good Deal
Just because your credit may be a little low doesn’t mean you’re not a valuable customer. It’s important to keep this in mind as you shop for lending opportunities and car deals. Some lenders might target individuals with low credit scores and try to convince them that they’re the only loan option available. Remember that this is never the case.
Your options may be more limited than some, but they aren’t zero. It is always your right to find other lender offers so you can compare your options. This attitude can help you connect with honest lenders and help you avoid those who might try to stick you with hidden fees like loan contracts, astronomically high interest rates, or unexpected maintenance payments. Be sure to do your research and avoid deals that look too good to be true, as they probably are.
Tips For Getting Auto Loan Approval With Bad Credit
Walking into a loan office or dealership armed with knowledge is one of the most effective ways to gain approval for a car loan if you have bad credit. In addition to researching your own financial situation and the lender, you can review tips that might help you find the best deal.
Shop For Affordable Vehicles
The specific vehicle you purchase can impact the loan approval process and your eventual interest rate. Shopping for an affordable car is a great way to reduce the amount you need to borrow. For buyers with bad credit, this is a smart move because it poses a lesser risk to the lender or dealership if you can’t make back your payments.
This means the dealer may offer you a better interest rate. Choosing an affordable car can also benefit you because you may be able to pay it off more quickly, reducing the amount you’ll have to pay in interest.
Find a Co-Signer
A co-signer is an individual who is willing to sign your loan deal alongside you. By doing so, they vouch for you as a customer. If you fail to repay the loan, your co-signer is responsible for ensuring the lender gets paid.
This means it is essential for there to be trust between you and your co-signer. By adding their name to your document, they are investing their own financial reputation and wellbeing.
Having a co-signer can be a valuable asset when applying for a car loan with bad credit, especially if your co-signer has good credit themselves. Their endorsement and the reassurance that they will pay the loan if you can’t can put the lender at ease.
This might result in a better deal with a lower interest rate. Some lenders might require individuals with bad credit or those who are currently unemployed to apply with a co-signer to ensure they eventually get their payments.
Know When To Walk Away
If a lender offers you a deal that poses a significant, long-term financial burden, don’t be afraid to walk away from the deal. There are many options available for affordable cars, so you shouldn’t feel tied to any one deal or lender.
Remember to pay attention to the overall cost. While a lender can make a deal look exceptionally affordable by breaking it down into small monthly payments, those payments will add up with interest. If you’re not sure you can afford the full cost in the long term, take a step back and look for a better deal.
Car Loan Credit Implications
A car loan can be a good thing for your overall credit situation. If you apply for the loan, gain approval, and then pay it back in a timely manner, the entire affair can help establish your financial responsibility. You can use this positive credit history to show other future lenders that you are a reliable client with whom they can collaborate.
On the other hand, if you end up missing payments on your car loan, it might cause your credit score to sink even further. This means that it’s important to make sure you’re in a healthy enough financial situation to make back your monthly payments. If that’s the case, getting a car loan can be a wonderful opportunity to improve your financial reputation.
Alternative Options To Consider
You might go through with all the research and budgeting only to decide that the amount you’re likely to pay with your current credit score is too high to reasonably consider. If that sounds like your situation, don’t worry, you still have options for buying that ideal vehicle.
Work On Your Credit Score
If you have the ability to wait a little while before making your purchase, it might be worth it to spend some time getting your credit in order first. Make sure you understand why the score is low, then make some changes to address the underlying issue.
For example, if your score is low because you have missed some payments, you can work to reduce outstanding debts and consider setting up an automatic payment system to avoid missing any more going forward.
Over time, as you correct the mistakes or behavior that caused the credit score to drop, you may notice your score steadily improving. This can put you in a better position when applying for an auto loan. You can also use this time to save up some money for a down payment and for your eventual monthly loan payments.
Trade In Your Current Vehicle
If you have a car and you’re hoping to replace it, you may be able to trade your current vehicle to a dealership for credit towards a new car. This can help you get your foot in the door, even with a low credit score.
In some ways, you can think of your trade-in as a down payment on the new car. Once you count that amount towards your new car, you’ll just need to take out an auto loan to cover whatever is left in the difference between the prices of the two cars.
To determine how much your current car is worth, check out Car and Driver’s trade in tool calculator. Many offer online tools you can use to value your trade for free and from the comfort of your own home. Alternatively, you can look for other trade value tools online or bring your car into a mechanic or dealer to get it appraised.
Consider Refinancing
Loan refinancing is the process of taking out a new loan to help pay off an outstanding loan. It can also refer to the process of changing the terms of the original loan. If you can’t wait to buy your car and a trade-in deal isn’t going to cut it, refinancing is a possibility that can help make it possible for you to afford your new car. After several months of paying the original high interest rates, you might be able to strike a deal for a new loan with lower interest rates.
In the long term, this strategy can help save you money. However, there is no guarantee that you’ll be able to find a lender willing to give you a refinancing deal. This makes it a good idea to have a financial backup plan or to create a refinancing agreement contingent on timely payments at the time of the original purchase.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
