Car loans with bad credit: introduction

Buying a car today is nearly always not a big issue: if you can’t afford to pay the whole lump sum, getting financed from auto loans is the solution. In order to qualify for a car loan, you need to submit your credit score to lenders: simply stated, many of them won’t accept your application if you have bad credit, which is considered a FICO score anywhere below 669.

However, this doesn’t mean it’s impossible to obtain a car loan with bad credit. Several lenders allow this at the price of higher interest rates than you would get if you were a “prime borrower”, with credit ratings from 620 up to 850.

When you try getting a car loan with bad credit, there are two main possible scenarios:

• You are not in a hurry to purchase a car: in this case, you can take the time for a set of measures aimed at increasing the credit score. This way you’ll have a greater chance to be approved and to be granted lower rates.
• You need urgently to buy a car: in this contingency, there are also strategies to be financed even with bad credit. Making a substantial down payment is one of those, likely the most beneficial.

Regardless of your situation, first and foremost you should budget your spending: you have actually to consider if you can afford your car costs over the next years. Choosing a longer loan term will surely lower the monthly payments, but increase the costs which come from interest. Besides, If you decided of selling or trading-in your vehicle after a few years, you will have an “underwater” loan, whereas what you owe will be more than the future current auto’s purchase value, due to the natural depreciation a car undergoes with years.

We are about to discuss in more detail both the points so that you will be on your way to getting a car loan even with a damaged financial condition.

How does credit score work for car loans?

The purpose of credit score is to determine the risk involved in lending you the money you need: the lower the score, the lesser is the chance that you are able to repay what you borrowed, and this is a lender’s perspective. It’s no surprise that higher interest is charged on people with bad credit, a compromise for accepting that risk. Put it in other words, car loans for bad credit profiles are more expensive loans than those aimed at good and excellent ratings.

According to our research*, the rates you get in the “subprime” category, which is strictly 580- 619, can range roughly from 6% to 11% and are 12%- 17% (beyond 20% in some cases of very poor credit) for “deep subprime” which is below 580, depending mainly on the loan term, and if the car is new or used. In contrast, for “near-prime” and “prime” credit scores (620+), you would get rates between 2.49% and 4.75%, but always below 6%.

To know your credit score, lenders will typically perform a credit check, which is to determine your rate/term pair, and loan amount. This inquiry pulls some numbers from the score itself when and once you are applying directly to a car loan, which in the financial jargon is known as a “hard pull”. However, many lenders today allow you to prequalify, and usually this can be done online in a matter of minutes: you’ll see very close estimates of your final possible rates and terms, and this step requires just a “soft pull” on your credit score, that won’t imply losing points from it.

 

How can you obtain a car loan with bad credit?

Before approaching a car loan, it is widely recommended as a first step to check your credit score by yourself: this will be actually performed from the lender of choice, but doing it on your behalf has two important implications:

1. knowing where you are standing spares you time: if it’s bad credit, you would refine your research to companies specializing in lending to bad credit borrowers only, instead of blindly applying to random lenders, and seeing your application denied;
2. you may decide to defer the car purchase, and taking time to improve your score, so to increase to chance to qualify for car loans with lower rates. This will literally save you thousands of dollars in interest.

There are several ways to check your score for free: you have one inquiry available from each of the three major credit bureaus: Experian, TransUnion, and Equifax and you can get it from annualcreditreport.com. We also report the following websites: freecreditscore.com and credit.com, but there are even more of them.

You’ll need to double-check your report for any error, which you can claim: any inaccuracy affects your score negatively.

Now, if you are in the situation you have just the idea of having a new car, but can wait for it, here are what financial experts suggest to do:

• Saving for a down payment: paying down a portion of the car value makes your loan smaller, thus reducing both its interest and term. Besides, you are telling the lender you are confident to pay, that’s why you’ll have a greater chance to be approved; moreover, you’ll get more favorable conditions for the loan. The more you put down, the better your loan rates, terms, and chances to qualify.

Some lenders ask for a down payment as a requirement, others don’t. Regardless of whom you are dealing with, making a down payment is a great move to lower the overall cost of your car loan.

• Using a cosigner: a person of trust who is willing to co-sign your loan and taking 50% liability for the repayments. The cosigner’s credit score should be at least a good FICO score to make sense of this move, that will allow you to qualify, or if you are just interested to get a more affordable rate and sustainable term. However, some lenders won’t allow cosigning their loans and finding the ones who do may be tricky.
• Comparing loans: shopping among multiple lenders is worth the time if you want to find the lowest rate and the better term possible for you. Today it’s no hard to discover lenders that can accept bad credit borrowers: we are sifting through them shortly.

If you obtain rates from lots of lenders in a narrow timeframe (45 days max for lenders adopting the FICO scoring model) through their prequalification step, that will count as a unique credit inquiry, therefore it won’t impact your credit score at all.

In case you can’t wait, you can just choose a cheaper car: since the loan amount will be lesser, your score might suffice for qualifying to borrow that smaller amount.

Further options are:

• “Second chance” lenders: despite you can’t qualify for a traditional auto loan because of poor credit, these lenders will find a solution that suits your situation, no matter your score. Again, it’s about a network of lenders dedicated to serving people with very poor credit profiles, among which there are credit unions and online loans. However, you must expect both high rates plus fees from such offers.

Where to get auto loans with bad credit?

There are a few options you can rely on when it comes to a car loan with bad credit. Here is a comprehensive list:

• Your own bank or credit union: sometimes it’s convenient to get a car loan directly from institutions you have already a relationship with. You are likely to obtain advantageous rates, and it can be quicker and easier. They already know your financial standing, and the processing of funds should be straightforward than a transfer from another source.
• Car dealerships: many dealers partner with lending companies including banks, so you would have a one-stop-shop place to buy your desired car. They will search for multiple offers and find lenders in their network that cater to bad credits: whether this is hassle-free for you, it’s unlikely that they find the lowest rates possible.

Some of these have captive auto lenders, which thus operate as subsidiaries of cars manufacturers: they lend specifically and exclusively to finance the purchase of cars of their brands. Just to mention a few examples, Toyota, Hyundai, and Ford provide a captive lending service. It’s about indirect lenders, so you have little chance of negotiation with them.

• Online lenders: this is a valuable and recommended choice because it gives you the greatest buying power. When you find a low rate from a lender specialized in bad credit loans, you have the proper knowledge to liaise your rate at a dealership. As a reminder, most lenders have a prequalification step without any commitment or cost that makes you see your rates, thus you are encouraged to compare more lenders.
• “Buy here, pay-here” dealerships: in these cases, the dealers don’t look at your credit score at all, but grant you loans with significantly higher interest than you would get elsewhere. This option is viable only if you failed to qualify from traditional and online lenders, provided you can bear the costs of such loans.

What are the requirements for a car loan with bad credit?

Whether your application is online or face-to-face, a set of basic information usually needed for car loans with bad credit are:

• US citizen/permanent resident, legal age, and driving license
• Proof of residency with a current utility bill in your name
• Proof of income: the minimum monthly pre-tax income is usually $1,500 from a single source
• Employment status: currently employed for a minimum of six months at the same job position
• No recent bankruptcy
• Proof of a working landline or contract cell phone in your name
• A few references of yours: names, addresses, and phone numbers.

This paperwork is what you should have at your fingertips when showing up at a dealership. On top of that, most subprime lenders will need a down payment. In many cases, they ask at least $1,000 or 10 percent of the vehicle’s selling price, but it will depend if it’s about a new or used car, and on how bad is your credit score.

Furthermore, lenders want to ascertain that you are comfortable with the repayments, that you can pay auto insurance, alongside your other monthly obligations: besides the credit score, they will also use the debt-to-income ratio (DTI) and payment-to-income ratio (PTI). Your DTI is what portion of your income is spent to face the total of your monthly obligations: to qualify for a car loan with bad credit, lenders put different caps for the DTI, but always below 50%. Your PTI, instead, considers how much of your gross income(s) is used for a car and related insurance payment only: in this case, lenders don’t allow more than a 20% ratio.

That’s not to say that you should engage in these calculations before even trying to apply but to have a better understanding of how a lending company evaluates your financial profile overall. That’s useful to know where and how you can improve if you want to get your needed loan under the best conditions.

Bottom line

Getting a car loan with bad credit is definitely possible, but you’ll be hard-pressed to find a dealership accepting to lend you as much as your credit score is poorer. Fortunately, the fintech industry has eased the process, and today is possible to find several online lenders that do the job.

However, you have to expect relatively high rates. If you can stall, you could save for a down payment (the biggest, the best) or try to increase your credit score, by paying off at least some pending debts or consolidating them. If in a hurry, finding a cosigner is the quickest way to access a loan that was unfeasible at first.

Other evergreen recommendations are to budget your assumed costs and compare your options.

We advise you to look at our reviewed car loan companies: we have chosen them based on their strong points, which should orient you better toward the proper choice. Then, compare their rates for free, without any damage to your credit score, and you will surely find your best deal.

*The data come from a mix of what we found from Experian, the Federal Reserve, and some popular online auto loan providers. Mind these are just ranges and averages: your final rate will depend on many factors, including the chosen loan term, new or used car, the auto’s purchase value, and a set of personal and financial indexes, such as your current debt obligations.