How to Get a Car Loan Even if You Have Bad Credit

You may be concerned that if you’ve got a low credit score, you will not be approved for a vehicle loan from a conventional lender. Before agreeing on a loan from a buy here, pay here dealer, look into other options.

Buying a car with bad credit – a credit score of 300 to 579 — is doable, but it may be more difficult and costly. However, the cost of your loan may be much lower if you go through a bank, credit union, or internet lender rather than a dealership.

How to Get a Bad Credit Car Loan

A lower credit score does not bind you to terrible deals. Knowing average rates & applying for pre-approval are just two of the many methods you can receive a low-interest vehicle loan.

Understand your credit score

Before you start buying, verify your credit score. Any score below 580 is deemed poor by the FICO credit rating system, which goes from 300 to 850.

Your FICO score is determined by factors such as the amount you owe, the length of your credit history, and your payment history. Making late payments, spending more than your allotted monthly credit limit, and having a short credit history can all have a negative impact on your credit score.

Read More; How to Bargain a Car Lease

Put money aside for a down payment

Making a down payment on a car can help you get approved for an auto loan if you have a low credit score.

A down payment can also help you qualify for better terms by offsetting higher interest rates and lowering your loan-to-value ratio. While a bigger down payment is normally preferred, lenders may be ready to accept as little as 5%. Even a small sum can help defray the expense of purchasing an automobile.

Conduct research

Prepare as much as possible to avoid being taken off guard when it comes time to negotiate. Before you apply for a loan, determine your monthly payment and the annual percentage rate (APR) you might expect based on your credit score.

If you have a low credit score, you will most certainly be offered some of the most advertised rates. According to Experian data, subprime borrowers may expect an average interest rate of 11.53 percent for new cars or 18.55 cent for used cars.

It also helps to know its Kelley Blue Book (KBB) worth of your selected car if you’re buying used, or the manufacturer’s suggested retail price (MSRP) if you’re buying new.

Do some comparison shopping

When you start looking for a lender, don’t limit yourself to just one. There are numerous lenders who can assist you in obtaining a loan, and you can discover the best rate by comparing multiple lenders.

Banks and credit unions: Begin here if you already have a relationship with a credit union or bank. Some banks and credit unions provide member discounts and may be more ready to approve your loan if you have a long banking history.

Many online lenders offer prequalification, which allows you to check what terms you might be eligible for. When you apply, some lenders may take into account additional factors such as your employment history or education.
Car dealerships: If you are unable to acquire a loan from another lender, you can finance through a dealership. However, dealerships frequently mark up the rates they provide in order to profit more from the transaction. As a result, while qualifying may be easier, your rates are likely to be less competitive.

Buy-here, pay-here dealerships: If you are unable to obtain a loan from a bank or lender, consider using a buy-here, pay-here dealership. While some dealerships are more likely to grant a loan for someone with bad credit, the interest rates can be significantly higher.

Get pre-qualified with lenders

Prequalification allows you to determine if you qualify for a loan before applying and view expected loan terms. It can help you save time and avoid unwanted hard credit checks, which might temporarily reduce your credit score.

Once you’ve been prequalified by a few lenders, compare interest rates to discover the best price. After that, you can submit documents and get preapproved for your preferred choices. A hard credit check will be performed, but a preapproved auto loan carries greater weight because it signifies the lender’s commitment to issue a vehicle loan to you. You’ll also have more negotiating power when you walk into the dealership as a cash buyer.

Stay away from subprime lenders.

Subprime lenders may appear to be a safe alternative for anyone looking for how to acquire a vehicle loan with terrible credit. These lenders typically serve customers with weaker credit ratings and can make the car-buying process appear simple and stress-free – at least at first. However, subprime auto loans can have exorbitant interest rates, costing thousands of dollars in interest over the life of the loan.

Compare loan terms rather than monthly payments.

Lower monthly payments appear attractive on paper and are frequently used to tempt customers. However, because they have longer durations, they may result in you paying more for your automobile throughout the life of the loan. Because bad credit vehicle loans have higher APRs, you may end up paying thousands of dollars more than the car’s actual value by the end of the loan due to interest accumulation.

When browsing, opt for the best terms – usually the lowest APR over the shortest length of time. As a result, you will have easier to handle monthly payments with lower interest rates. Prequalification and preapproval are useful in this situation.

Think about getting a co-signer.

Consider having a trustworthy friend or family member co-sign your car loan. This person should ideally have a consistent source of income, a high credit score, and a long credit history.

Co-signers minimize lenders’ risk because they are accountable for the loan if you are unable to make payments. A co-signer can be an effective negotiation strategy, resulting in a cheaper interest rate. However, even if the co-signer does not own the vehicle, their credit score may suffer if the loan becomes late.

Bring a companion with you to the lender.

Yvonne Rosmarin, a consumer attorney in Massachusetts, recommends taking a friend or relative to the lender’s office. Bringing someone you trust to the bargaining table might boost confidence. And, when combined with knowledge, confidence can lead to more favorable lending terms.

Keep an eye out for add-ons.

According to Josh Frank, a former lead researcher for the Center for Responsible Lending, subprime purchasers are more likely to find lending arrangements that include non-essential products and services. Other expenses, such as auto insurance premiums, might mount if you have poor credit.

Never accept a loan that is conditional on the purchase of any add-ons, such as extended warranties, aftermarket services, or car insurance. Be mindful of these extras, especially if you plan to trade in your vehicle or apply at a buy-here, pay-here dealership. And keep in mind that incorporating these fees into your loan implies you may borrow more than the car is worth, increasing your chances of being upside-down on your loan.

Ensure that the terms are final.

If you finance through a dealer, always double-check the terms before signing. Be alert if a dealer offers you conditional permission so you can drive off the lot. Because the terms of your loan aren’t written in stone, you may incur greater monthly payments than you committed to.

Some unscrupulous sellers may attract car customers with low advertising rates, only to raise them after the consumer signs a contract. Yo-yo financing is the name given to this fraudulent tactic. While the approach may appear to be comparable to conditional approval, it is unlawful.

Where can I get a bad credit vehicle loan?

Most banks, credit unions, and online lenders offer car loans. You can also use dealership finance, but an internet lender is more likely to provide you with a bad credit loan with fair terms.

To consider, multiple lenders offer bad credit vehicle loans with affordable rates and generous repayment terms.

APRs on bad credit auto loans

Auto loan options with good or excellent credit are the most competitive. That is not to say that if your credit score is bad, you will automatically go over your budget. Before you buy, calculate the total cost of a car loan. While the APR is significant, you can change the loan period and amount borrowed to fit your budget.

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