How To Find The Best Car Loan
For Bad Credit
While bad credit won't necessarily stop you from getting a car loan, a low credit score can make the process more difficult. For many people, buying a car is already a bit of a headache.
The last thing you need is a hassle when it comes to financing.
Fortunately, there are several reputable lenders that offer auto loans to people with less than stellar credit.
Read on for a list of our top picks, as well as a guide to making your next car shopping adventure as smooth as possible.
Our picks for the best bad-credit auto loans
Before you hit the car lots, it's a good idea to have a solid plan in place for financing. If you have bad credit, you'll probably find that your options are somewhat limited.
Many dealerships won't work with you if your credit score is below a certain threshold. If you're concerned about your score, it's worth taking a look at lenders willing to finance a car loan for people with bad credit.
The good news is there are plenty of online lenders and loan aggregate sites that offer auto loans to people with bad credit.
Here's a list of our top picks.
If you have bad credit or a lack of credit history, Auto Credit Express might be able to connect you with a lender that can help. While you don't need a specific credit score to qualify, you must earn a minimum of $1,500 a month to apply.
Auto Credit Express has been in business since 1999 and has an "excellent" average review rating from over 1,400 reviewers on Trustpilot.
As an online marketplace for auto financing, car.Loan.com can match you up with dealers and lenders near you. Because the site is a lender network rather than a finance company, it doesn't set any restrictions on financial requirements for its borrowers.
To apply, you simply fill out the site's online form. From there, car.Loan.com will return a list of lenders willing to work with you based on the information you provide.
Like the other companies on this list, myAutoloan.com is an aggregate site for car loans. Using the site's online application, you can compare offers from up to four lenders at a time.
The site has an average "great" rating from over 500 reviews on Trustpilot, as well as an A+ rating from the Better Business Bureau.
If you make at least $500 a week, you can apply for an auto loan through Cars Direct, which specializes in pairing borrowers with lenders who offer car loans to people with low credit scores. The site doesn't require a certain credit score, but its various lender partners might.
According to Cars Direct, its online application form takes just 60 seconds to fill out. After you submit your information, the site will connect you with possible lenders.
If you're willing to select a vehicle from Carvana's inventory of used vehicles, you might be able to finance through them, as well. The site doesn't have any specific credit requirements, although borrowers must make at least $10,000 per year.
Carvana also completely eliminates the dealership, which makes it a good option if you dread the bargaining process involved in buying a car.
Once you choose your vehicle, you can either have it delivered or pick it up from one of Carvana's car vending machines — all without ever stepping onto a car lot.
Carvana only offers used cars, but each vehicle on its site goes through a Carvana certification process. Its cars are also backed by a bumper-to-bumper warranty, so you can shop with peace of mind.
Most people are familiar with Capital One as a bank and credit card company, but you might not realize it offers auto loans for borrowers with bad credit. If your credit score is at least 500, you can apply for a loan.
- Vehicle can't be more than 10 years old
- Vehicle can't have over 120,000 miles
Capital One also offers pre-qualification, so you can see if you qualify for a car loan without risking any damage to your credit score.
Unlike the other companies listed here, Lending Tree doesn't necessarily cater to borrowers with bad credit. However, its partnerships with a vast network of lenders means even those with poor credit can usually find a match.
You won't pay a markup on any loan offer you receive through Lending Tree. Just fill out the site's application and get up to five car loan offers at a time to compare.
How having bad credit can impact your car loan
Whether you're in the market for a new or used car, the reality is that most vehicle purchases will set you back several thousand dollars.
With the average price of a new car coming in at $37,000, few people can afford to pay out of pocket for a vehicle. This means getting a car loan.
If you have bad credit, you can expect to pay more for your car.
While the sticker price won't change, your loan's interest rate will almost certainly be higher than someone with good credit—this means you'll end up paying more for your car over time compared to someone with a better score.
Here's a look at how your credit score determines how much you can expect to pay for a new car with a price tag of $20,000, financed over 60 months with no trade-in.
Keep in mind that interest rates will vary depending on your score.
This chart also doesn't account for additional expenses, such as sales tax, title costs, and other fees. Unless you live in New Hampshire, you'll also need to pay for auto insurance before you can legally drive.
Total Cost of the Loan
As you can see, the difference between a credit score of 500 versus 800 can add up when it comes to vehicle financing.
Someone with a low score can easily end up paying over $5,000 more over the life of their auto loan compared to someone with excellent credit.
A low credit score can hurt you in another way, too.
In addition to higher interest rates, you might have trouble finding a lender willing to offer enough financing to cover the cost of your desired vehicle, which can narrow the types of cars available to you.
Terms to know before you apply for an auto loan
Before you shop for a car loan, it's a good idea to get acquainted with car loan terminology—this will help you avoid getting blindsided by unfamiliar lingo as you search.
- Loan term - The loan term is the length of the loan. You'll typically see this expressed in months, such as a 48-month term or a 60-month term. Generally, a longer term means a lower monthly payment, since you spread the payments over a longer period of time.However, longer loan terms aren't always the best option. In most cases, the longer the term the higher the interest rate. You might pay a lower monthly payment, but you'll end up paying more in interest. This is why it's important to run the numbers and use an auto loan calculator before agreeing to a loan.
- Interest rates - This is the interest rate you pay on the money you borrow to purchase the car. Typically, you'll see the interest rate as an annual percentage rate (APR). The higher your credit score, the lower your APR will be.
- Rate shopping - As the name suggests, rate shopping means shopping around for the best interest rate on a car loan — or any other kind of loan, such as a mortgage. While it's smart to search for the very best rate, remember that applying for a car loan usually means lenders will make a hard inquiry on your credit report. Because multiple hard inquiries within a short period of time can hurt your score, it's important to avoid racking up too many.
- Soft vs. hard credit pull - A soft pull on your credit report won't hurt your credit score, whereas a hard pull will. It's not always easy to tell if a credit application will trigger a soft or hard inquiry. Some lenders will tell you up front, so it's always a good idea to ask. You can also minimize the damage of a hard pull by getting pre-qualified for a car loan. In most cases, a pre-qualification process counts as a soft pull, which won't impact your credit score. Once you're pre-qualified, you can narrow down your financing options and only proceed with lenders who offer the best rates.
How much down payment should you make?
As a general rule of thumb, you should aim to put down at least 20 percent of your car's purchase price. This will keep your monthly car payments within a manageable range that fits your budget.
Making a larger down payment can also help you snag better loan terms, since putting down more will likely open up a larger pool of lenders willing to work with you.
The more money you put down, the less risk the lender takes on. As a result, they're more likely to offer you a lower interest rate, which will save you money over the life of your loan.
If you can't afford to put down 20 percent, try to put down as much as you can. In some cases, it's a good idea to delay buying a new car while you save up for a down payment.
Should you use a co-signer?
If a low credit score is holding you back from getting a car loan, you can try asking someone to act as a co-signer on your loan. This reduces the risk to the lender, which can make them more likely to offer you financing.
By using a co-signer, you give the lender two people to count on to make the monthly payments on your loan. At the same time, co-signing on a car loan is a potentially risky proposition for the co-signer.
If you stop paying, the lender will go after your co-signer for payment. This is why it's important to make sure you can truly afford a new car before you ask someone to sign on.
If you default on your car loan, it can have a negative impact on your co-signer's credit score. It also leaves them on the hook for your car payment. It goes without saying that this situation can create a sizeable rift in any relationship.
18 Tips For Buying A Car With Bad Credit
By following the tips below, you'll have a better chance of getting approved for your car loan and paying less on your monthly payment.
1. Clean up your credit before you start shopping
Before you hit the dealerships, know what you're dealing with in terms of your credit score.
Start by obtaining free copies of your credit reports from all three credit bureaus, then check each one carefully to find out which items are dragging down your score.
If you see errors, or you spot hard inquiries that shouldn't be there, start the dispute process right away.
See late payments or high balances? Pick one or two balances and make extra payments to help lower your credit utilization.
Ideally, you should start cleaning up your credit sooner rather than later—even six months or more before you plan to buy a car.
People with higher credit scores pay lower interest rates, so working on your credit score now will almost certainly pay off by the time you're ready to hit the road.
2. Avoid credit mistakes that will lower your score
As you prepare to shop for a car, follow good credit best practices—this means paying your bills on time, keeping your credit card balances low, and avoiding any kind of liens or collection accounts.
You should also avoid taking on any new debt, such as opening a credit card or taking out another kind of loan. In short, don't do anything that could lower your credit score.
3. Consider the entire cost of owning the car
When you own a car, you're responsible for a lot more than just your monthly car payment.
Before you shop, factor in the various costs you can expect to pay for your new wheels, including things like car insurance, fuel, tune-ups at the mechanic, and snow tires in the winter.
4. Know what kind of interest rate to expect
Loan interest rates are an important part of the auto loan big picture—a lower interest rate will make your monthly payment lower, which can determine what kind of car you can afford. If you have bad credit, you should expect to pay more in interest.
On the other hand, be wary of interest rates that seem higher than average, as people with bad credit are often targets for predatory lenders.
Check out approximate interest rates online before you start your car search. You can find free auto loan calculators that give you a ballpark estimate based on your credit score.
5. Be smart about timing your loan applications
It's a good idea to shop around for loans, but be cautious about applying for too many at once.
When you submit a loan application, lenders pull your credit report, which counts as a "hard inquiry", and having too many of these on your report can lower your credit score.
If you time it right, however, you can avoid racking up too many hard inquiries. Most credit scoring models count multiple auto loan inquiries made within a short timeframe (usually 30 days) as a single inquiry.
This makes sense, since people applying for a few different car loans at once are likely shopping for a vehicle. If you make all of your loan applications within a narrow timeframe, you probably won't end up with numerous hard inquiries.
6. Consider a shorter-term loan
Having bad credit usually means paying a higher interest rate, but you might be able to get around this by choosing an auto loan with a shorter term.
For example, you'll likely pay lower interest on a three-year loan compared to a five-year loan.
The catch is that shorter term loans typically have higher monthly payments, so before you sign, make sure your budget can handle the extra expense.
7. Make a bigger down payment
If a bad credit score is limiting your auto loan options, you might be able to broaden your choices by putting more money down.
A bigger down payment will lower the total amount of the loan, which means lower monthly payments and less interest overall.
8. Know what you can afford to pay
Before you plunk down a large down payment or finance a car with a big price tag, make sure you can truly afford it. This is where having a monthly budget can help you make an informed decision about what kind of car to buy.
It's also important to resist the various bells and whistles that can drive up the cost of your car. While upgrades like top of the line trim packages and fancy speaker systems can be tempting, they'll also cost you.
Your car loses value the second you drive it off the lot, and it'll depreciate about 20 percent the first year you own it. You might appreciate the upgrades now, but you won't recoup your investment in the long run.
9. Get pre-approved
If you're struggling to find an auto loan, look into getting pre-approved for a loan through your bank or credit union.
Pre-approval lets you know how much you can spend in advance, so you can more easily shop within your budget. Being pre-approved can also put you in a stronger negotiating position when it's time to deal with car salespeople.
When you're ready to get pre-approved, it's usually best to start with your current bank, where you might have access to more options and better interest rates.
Unlike a dealership, your bank isn't in the business of selling cars, which means they're not interested in pushing you into a pricier vehicle.
10. Comparison shop
Don't be afraid to shop around for the best deal. Before the internet, car shopping meant taking an entire Saturday (or more) to hike from dealership lot to dealership lot, fending off pushy sales associates.
While you might not be able to avoid the car lots altogether, you can definitely go into the buying process more prepared.
Start your search online to get an idea of current prices and the best deals. Look for manufacturer discounts on certain models, as well as end-of-the-year sales when dealerships are trying to clear out the previous year's stock.
You should also comparison shop for your auto loan.
If you can't get financing through your bank, you can probably still obtain a loan through the dealership. You can also research lenders and interest rates online to narrow down your search before you're ready to shop.
11. Inquire about refinancing down the line
If you already have a car loan, it may not be too late to get a better deal. In some cases, it's worth checking into refinancing.
When you refinance your auto loan, you take out a new loan to pay off the old one—replacing your previous loan with one that offers more favorable terms, such as a lower interest rate. This can make your monthly payments more manageable and save you money in the long run.
People refinance their car loans for a variety of reasons. In some cases, it's as simple as taking advantage of a lower interest rate. If rates have dropped since your last loan, even a few percentage points could make a difference for your monthly payment.
You might also want to look into refinancing if your credit score has gone up considerably, as this could open the door to better interest rates.
12. Be careful with "buy here, pay here" financing
You've probably heard car dealership commercials offering financing for those with "bad credit or no credit." In some cases, they even offer to extend financing without conducting a credit check.
Known as "buy here, pay here" deals, these auto loans can look attractive when you have bad credit.
However, dealerships that offer this type of financing are also frequently associated with high interest rates and low-quality vehicles.
13. Look into non-profit lenders
If you've struck out with the banks, and you can't find a good loan through the dealerships, you might quality for an auto loan through a non-profit lender.
14. Only try for a personal loan as a last resort
Auto loans aren't the only game in town when it comes to financing a vehicle. If you're struggling to find a car loan, you might try looking into a personal loan.
But, there are quite a few reasons why personal loans usually aren't the best option for buying a car.
Because they're not secured by collateral (the car), personal loans pose a higher risk for the lender, which means they tend to come with higher interest rates, which often makes them more expensive in the long run.
Personal loans can also be riskier for the consumer. In many cases, they involve more fees, and many lenders charge prepayment penalties if you choose to pay off your loan before the term ends.
15. Keep the loan in good standing (and make additional payments when possible)
If you have bad credit, an auto loan can help boost your score—but only if you make your payments on time. Make sure your budget can accommodate a car loan, as even a single late payment can lower your credit score.
You can also pay less interest over time if you make extra payments or pay off your auto loan early. Before you borrow, make sure your loan doesn't impose any penalties or fees for early payoffs.
16. Don't fall victim to predatory loans
It's sad but true: people with bad credit are favorite targets of scammers and predatory lenders.
Loan paperwork can be filled with legalese and financial terms that don't make sense if you're unfamiliar with them—bad faith lenders know this, and they take advantage of your confusion and desperation.
Some dealerships even use bait and switch tactics to trap people into high-interest loans.
For example, the dealer might let a consumer leave the lot with a car, with a promise to finalize the loan details later on. A day or so later, they contact the person, claiming the loan fell through and now the terms have changed.
This is why it's important to do your homework and be willing to explore your financing options. It's also critical to have a final, signed auto loan agreement before you take the car home.
17. Read your loan paperwork carefully
Most car loan contracts include a great deal of fine print, and some car salespeople might pressure you to breeze through the various contract provisions, initialing as you go.
But it's important to take time to read everything thoroughly—and to make sure the terms match up with the verbal agreements you made out on the lot.
The fine print is where you'll often find hidden fees, extra charges, and taxes the dealership forgot to mention.
These additional costs can quickly add up, making your monthly payment balloon past what you originally agreed to. Taking time to read and understand your loan contract can stop you from getting in over your head on your car payment.
18. Resist the temptation to trade up
If you're trading in your current vehicle, it can be tempting to upgrade your next one.
But trading up means paying more, which can eat into your budget and make it more difficult to pay down your debts.
Over time, this makes it tougher to work on boosting your credit score.
Car dealerships know how alluring a new car can be, and they work hard to get you to trade up for the latest and greatest model.
If you're carrying over a balance from your old loan, however, upgrading can just saddle you with extra debt you don't need.
Shopping for a new car can be a hassle.
If you have bad credit, it can quickly become a nightmare.
If you're patient and willing to do your homework, however, you can find reputable lenders willing to offer car loans to borrowers with bad credit.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in CNBC, Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.