If you want an auto loan but have imperfect credit, it’s an uphill battle. Lenders use credit scoring models to determine how likely it is that you’ll repay a loan—and the lower the score is, the bigger the risk. You’ll pay for that risk in the form of higher interest rates. In our guide, we’ll review some steps borrowers can take to find bad credit auto loans.
Check Your Score
Before looking for an auto loan, peek at your credit score. Review reports from the three major credit bureaus, looking for errors and disputing them when found. Mistakes will lower your score and affect your eligibility for auto loans. Afterward, contact us for bad credit auto loans guaranteed approval.
Checking your score will help you set realistic expectations when seeking an auto loan. If you don’t need the latest and greatest, taking time to build credit may pay off—and you may get a better rate. If you need a car right away, consider asking a friend or family member to cosign the loan. A co-signer with great credit will improve your terms, rate, and approval chances.
Put Money Aside for a Deposit
Saving money for a down payment offers several benefits. First, a deposit may improve your chances of loan approval, especially if you have poor credit. You will pay less interest, which means you’ll have a smaller loan that’s easier to repay. Finally, down payments lower the loan-to-value ratio, which most lenders consider when setting interest rates. Putting money down will help you save in the long term.
See What’s Affordable
When determining how much you can safely borrow, it’s important to think beyond the monthly payment. Consider the other costs of vehicle ownership—including insurance, registration, fuel, taxes, and maintenance—and add them to the budget.
While it might be tempting to choose a longer-term loan for a lower payment, it’s not always the best option. These loans come with added interest, and you may end up owning more than the car is worth. Upside down isn’t a good place to be!
Compare Loan Products
Shopping for comparable loan terms and rates from different lenders will help you find the best bang for your buck. If you have less-than-perfect credit, start with:
- Online lenders. Some platforms and lenders specialize in helping people with bad credit get the auto loans they need. You may be able to get prequalified online and see your estimated loan terms and rate. Prequalification, however, isn’t a guarantee of approval.
- Your credit union or bank. If you already have an account with a credit union or bank, it’s a great place to begin the search for an auto loan.
- Auto dealers. Car dealerships usually have working relationships with several finance companies and banks, which means they can likely find a lender who will approve your loan. Some dealers also have in-house finance departments, which focus on helping buyers with bad credit.
- Buy here, pay here lots. If you cannot find a loan through conventional channels and you need transportation fast, a buy here, pay here auto dealership is an option—but should be used as a final resort. While these dealers usually don’t do credit checks and offer loans to buyers with poor credit, their rates are higher than those found at banks and credit unions.
Timing matters when shopping for a bad credit auto loan. The FICO scoring model counts multiple inquiries of one type within 45 days as a single credit inquiry, while VantageScore shortens the period to 14 days. To minimize the credit effects of auto loan shopping, it’s wise to do all your comparisons within a short timeframe.
Get a Short-Term Loan
If you get a loan with poor credit, the lender will see you as a risk—but you can reduce their risk and lower the loan cost by financing in the short term. By choosing a 36-month loan instead of a 60-month loan, for instance, you’ll make yourself look better to the lender while paying less interest.
Long loan terms are costlier, even though they come with smaller monthly payments because lenders charge higher interest rates. When choosing a short-term auto loan, remember that you’ll pay more every month—and be sure you can afford it.
Read the Fine Print
As with other contracts, it’s important to read the loan paperwork before signing. If you’re approved at a high rate, ensure there’s no prepayment penalty. That way, you’ll be able to pay the loan faster and save on interest.
How High Should My Credit Score Be for a Car Loan?
Although there’s no universal minimum score for car loans, scores do affect approval odds and loan terms. A lower score may mean fewer offers and much higher interest—which is why it’s so crucial to shop for competitive terms. If possible, increasing your score before getting a car loan may improve the quality of the offers you receive.
Do You Want Better Credit? Apply for a Credit Building Loan
Requesting a credit-building loan will boost your score by giving you the chance to make timely, regular payments—which is a crucial part of major scoring models. With credit-building loans, lenders put borrowed money into reserve accounts. Then, you make regular payments, building a positive history that’s reported to the three major credit bureaus. When the loan is repaid, you get access to the funds. Credit building loan repayment terms, interest rates, and fees vary, so compare options before signing up.
Your Next Steps
Bad credit car loans are available, but they typically come at a high cost. Working to boost your credit score before shopping for a loan, however, will lighten the financial load.
If time is short and you need a car now, consider starting with a reliable pre-owned vehicle that meets your needs but costs less. As you pay off the smaller loan and build better credit, you might be able to refinance the loan for more favorable terms in the future.
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