How to Get a Car Loan with Bad Credit in 6 Easy Steps

A car is essential for meeting obligations like traveling to work or school and ultimately getting back on firm financial footing, but it can be difficult to obtain a loan when one’s credit has been damaged by economic hardship.

A credit score between 300 and 500 is considered unfavorable, making it more difficult to obtain a car loan. Although a higher credit score increases your chances of being approved for a car loan and receiving better interest rates, persons with bad credit still have options.

In order to get a car loan with bad credit, you need to find a suitable creditor or loan, as there is no minimum credit score required to acquire an auto loan. In addition, regardless of your credit score, you will find that the rates and fees associated with borrowing money from a bank, credit union, or internet lender are far lower.

With careful preparation and investigation, you should be able to locate a loan that works for you despite the fact that you may not qualify for all loans with a score like this and may pay extra for the ones you are eligible for. 

You can increase your chances of approval and decrease your interest rate by taking the following six steps:

1. Know Your Credit Score

You should look at your credit report before you start applying for car loans. Check your credit reports for mistakes and file a dispute if you find any. Credit ratings and loan eligibility are both negatively impacted by errors.

Prior to applying for a loan, checking your credit report might help you establish reasonable expectations. Any score under 580 on the FICO scale (which goes from 300 to 850) is deemed poor.

The length of your credit history, the amounts you owe, and your payment history all play a role in determining your FICO score. Negatively affecting your credit score are late payments, exceeding your monthly credit limit, and a lack of credit history.

A reduced interest rate on an auto loan could save you thousands of dollars, so if you don’t need a new car right now, working to improve your credit may be worthwhile. 

However, if you really can’t wait, a close friend or relative may be able to help out by co-signing on a loan. If you have a cosigner with good credit, you may have an easier time acquiring a loan or being able to negotiate better conditions.

2. Know Your Financial Capability

When looking to purchase a vehicle, there are two primary factors to think about: the down payment required and the ongoing maintenance and insurance costs.

Knowing how much you can afford to spend on a car each month is the first stage in the car-buying process. This includes the loan payment, insurance, gas, and maintenance. A larger down payment and larger monthly payment are necessary for more expensive vehicles.

Monthly savings for a down payment not only help you qualify for better conditions by lowering your loan-to-value ratio and offsetting higher interest rates resulting from a less-than-perfect credit score, but also assist you to avoid paying private mortgage insurance.

It is recommended that you put down at least twenty percent of the purchase price, but don’t stress if you can’t afford that much. There are some car lots that specialize in helping people with bad credit that would be willing to take a down payment of $1,000.

3. Save Money for the Down Payment

A down payment is generally required when purchasing a vehicle, such as a car. This will go toward the down payment on your car, and the rest of the price can be financed and repaid over time.

When purchasing a vehicle, the larger the down payment you are able to make, the more affordable your overall loan amount and your subsequent monthly payment will be. 

Additionally, making a higher down payment lowers the amount of risk that your lender is taking on, which increases the likelihood that your lender will provide you with a loan with a cheaper interest rate and ultimately saves you money over the course of the loan’s lifetime.

However, because it is not always simple to come up with a down payment, you may choose to postpone the purchase of your vehicle in order to save up for a larger down payment. If you do this, you may become a more desirable applicant, reduce the total amount that you owe, and improve your chances of securing a reduced interest rate.

4. Compare Multiple Lenders

The first step in applying for a loan is to perform some comparison shopping after you’ve got your financial house in order.

In the event that you are denied a loan by a traditional financial institution, you may want to investigate other lenders. Even though their interest rates may be higher than those offered by traditional banks, these alternative lenders are a good option for people with low credit scores.

You may need to apply with many different banks and credit unions before you find the loan that suits your needs while also offering the lowest interest rate. As was previously discussed, hard inquiries are recorded whenever a lender investigates your credit because of an application.

However, if you request loans from many different car finance companies during a two-week period, all of your inquiries will be aggregated into a single report.

5. Get Pre Approved

If you have your financial information available before you visit a dealership or a lender, you can usually find out quite quickly if you will be approved for a loan.

Nevertheless, if you have poor credit, one of the most effective ways to buy a car is to walk into a dealership carrying a letter stating that you have been pre-approved for financing from a local bank or credit union.

If you are unable to acquire preapproval or if you require financing through the dealership, it is imperative that you carefully review the terms, conditions, and fees associated with the loan before signing it. 

Take your time to read over the terms of any auto loan offered through a dealership because the federal government does not supervise every auto lender in the same way that it does traditional banks and credit unions.

In addition, you shouldn’t be afraid to back out of the deal if you believe the terms to be unfairly one-sided or if they feel like a “gotcha” moment. It’s not uncommon to find a second vehicle dealer or lender in the neighborhood who is willing to work with borrowers who have poor credit.

6. Consider a Co-Signer

Make sure you bring a buddy or a family member along with you. Attaining a more confident disposition during negotiations is facilitated by involving a reliable third party. And knowing your stuff, together with having confidence in yourself, can help you get better loan terms.

You might want to think about asking a reliable friend or member of your family to sign the loan with you. This individual should ideally have a consistent source of income, a great credit score, and an exemplary credit history in order to qualify for this loan.

Co-signers alleviate a significant portion of the risk that lenders are exposed to because the co-signer takes full responsibility for the loan in the event that the borrower is unable to repay the loan. Including a co-signer on a loan application can be a powerful negotiation asset, and it often results in a cheaper interest rate for the loan.

Who Offers Bad Credit Car Loans?

Understanding the many financing choices available to you is crucial when applying for a car loan. It’s possible to get a loan with bad credit from some lenders but not others.

It may be more efficient for you to apply for loans if you are familiar with how each lender operates. Some of the most frequent ways to finance a car with bad credit are as follows:

• Captive financing – Such financing is handled internally by the manufacturer. What this means is that you are not only making the purchase but also securing the loan through the dealership. Unfortunately, it’s not always possible to get finance like this for secondhand cars. 
  
  Captive lenders may be more willing to extend credit to those with less-than-perfect credit because they stand to gain financially if you purchase a vehicle from them.

• Loans arranged by the dealership – The dealer will shop around for the best interest rate and terms for you among other lenders. After applying, you could receive multiple loan offers from which to choose the one that best suits your needs. 
  
  Fair-credit borrowers may benefit from this choice because their information will be sent to multiple lenders all at once, some of which may be more willing to work with them despite their less-than-perfect credit.

• Financial institutions – When looking for auto financing, check with your local bank or credit union to see what possibilities may be available. In the same way that you would apply for any other loan with a bank, you would first get preapproval to take with you to the dealership. 
  
  Loan payments are made on a regular basis, straight to the lending institution. If you have a history with a certain financial organization, such as a bank or credit union, they may look past credit issues and use your track record with them as proof of your creditworthiness. If you can’t make it into a branch, many banks now provide online loan applications, including auto loans.

• Online Lenders – Nowadays, auto loans can be obtained from a variety of sources, not just brick-and-mortar banks and fintech (financial technology) firms. These loans are applied for entirely online and have interest rates that vary greatly from lender to lender. 
  
  You can uncover such deals by doing a web search for “car loans,” and then narrow your results down to “businesses” that operate solely in the virtual realm. 
  
  A loan aggregation website is another option, as it allows you to submit just one application and obtain offers from multiple lenders. Just be aware of new businesses and make sure to do your homework to ensure the lender you choose is legitimate and offering you a good rate.

• ‘Buy now, pay later’ – Those with low or nonexistent credit scores can find sympathetic partners in these merchants. They’ll use the money you borrow to buy a car from their lot, rather than giving it to a third-party lender. However, there are a number of drawbacks to this financing option, such as high-interest rates, substantial down payments, and maybe a restricted range of car options.

How a Car Loan Affects Your Credit

You should be aware that a car loan would have an effect on your credit score, and that this effect may be positive or negative, relying on how you manage your repayment.

The first thing that will show up on your credit reports is an auto loan application. In doing so, the lender demonstrates that they have investigated your credit records. Even while this entry can stay on a credit report for up to two years, it may have little bearing on your scores after only a few months have passed.

Your repayment history is often shared with at least one of the three main credit agencies by your lending institution. Making payments on time is crucial since negative information like this stays on credit reports for years.

FICO® Scores are affected by payment history (35% of the total score), thus even one late payment can have a negative effect. If you miss too many payments, the lender may repossess your car, which would have a terrible impact on your credit score.

Bottom Line

There is typically a lot of pressure involved with purchasing a vehicle, and this can have a huge effect on your credit rating, either positively or negatively. So, no matter how much you need a car, it’s crucial that you take your time and do your research.

Don’t take out a longer loan just so you can afford a car you really want if it’s more expensive than you can comfortably pay each month. If you finance an automobile for a longer period of time, you’ll end up paying more in interest and possibly more than the car is actually worth.

Autos are not like houses in that they increase in value over time. They supposedly lose value as soon as you drive them off the lot. Just remember that you are still responsible for the loan’s balance if you are compelled to sell the automobile before the loan’s term ends, even if you took out a longer loan to do so.

If you’re looking for a car but don’t have the money for it, your best choice is to walk away from the one you want and find another one that’s cheaper but still meets your needs.