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How to buy a car with bad credit

The do’s and don’ts of buying a car when you have bad credit

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When you need a car to get to work or drive your family safely around, you can feel pigeonholed if your current finances don’t match your needs. Public transportation just isn’t the answer for everyone, nor is it always practical. But if your credit score is considered bad or poor (i.e., your FICO score falls between 300 and 579), getting approved for a car loan can be challenging and costly.

Thankfully, there are options if you need to buy a car with bad credit, and it doesn’t involve paying a premium interest rate for the next five years, either. This guide will help you learn how your credit score affects your car loan and how to find options for getting a car loan with affordable payments if you have bad credit.

Key insights

  • Understanding your credit report is important before choosing a car since your credit score could be dragged down by reporting errors.
  • Saving up for a down payment can greatly improve your chances of approval and help you secure a more favorable loan.
  • If your credit is severely damaged, having a co-signer with good credit can increase your chances of loan approval.

8 tips for buying a car with bad credit

Having a low credit score can make it difficult to buy a car. Car dealerships typically increase interest rates for buyers with poor credit, also called subprime buyers, because lenders consider them greater potential risks than those with good credit.

If you have bad credit, reach out to a reputable bank, credit union or lender to see what options are available for financing your auto loan instead of automatically accepting a high interest rate from a dealer. Follow these steps if you're looking to buy a car with less than ideal credit.

Determine how desperately you need a car right now. If you can devote another three to six months to living car-free, that might be enough time to raise your credit score to a better level.

Even if you can increase your score enough to get a 1% better interest rate, that could save you hundreds of dollars in the life of your car loan.

Request a free credit report from AnnualCreditReport.com and check for any reporting errors, which can be corrected by submitting an online form through one of the three credit bureaus. If there are no mistakes, you can increase your credit score by making on-time payments and decreasing how much debt you owe on your current cards.

If you need to establish more credit, a secured card is one way to build credit. "If getting a car isn't an emergency, I suggest getting a secured credit card and spending at least six months (a year is better, though) responsibly using the card," said Beverly Harzog, a consumer credit expert and author of "The Debt Escape Plan."

» MORE: How to check your credit score

"Don't think that just because you have bad credit you can't get a car loan," said credit expert John Ulzheimer. In addition, "don't just assume that your credit is bad." Your definition of bad credit might not be the same as your lender's definition, and lenders have different requirements. Be sure to get quotes from multiple lenders so you don’t let one take advantage of you.

Additionally, don’t limit your shopping to car dealerships. Search locally for used vehicles in good condition that are within your budget. A family member or friend might be willing to sell you their used vehicle, accepting monthly payments until the car is paid off.

Buyers with poor credit are considered risky in the eyes of lenders. Even though your auto loan is secured with collateral, lenders still need to weigh the risk of financing you.

Putting a bigger down payment on your car shows that you are serious about this financial decision and also have more to lose, making you less likely to skip your monthly payments.

It's essential to only complete a credit application for an auto loan when you are actually ready to take one out. Otherwise, you risk making your credit score worse.

The good news is that scoring models typically count every credit inquiry performed by an auto loan lender within a two-week time frame as just one inquiry. Some lenders also pre-qualify you for a loan with only a soft pull, which does not affect your credit score.

Many times, buying an older vehicle comes with a higher annual percentage rate (APR). Ulzheimer recommends looking at new cars first and then newer used cars — these are the cars that tend to have the best financing options.

According to Experian, the average interest rate for someone with a credit score of 579 or below is 12.84% for a new vehicle and 20.43% for a used one.

You might have lower monthly payments with a five-year versus a three-year loan, but pay attention to the interest rate. Generally, interest rates are lower for short-term loans, meaning you pay less for your car overall. Plus, you pay off your car loan earlier, which lets you focus on paying off other debts.
While it’s not required, getting preapproved for a loan at a bank or credit union could help make your car search easier. To get preapproved, you submit an inquiry or meet with a lender. The lender reviews your income, credit rating and other factors to determine your creditworthiness.

If approved, the lender lets you know how much you can finance, and you’ll be able to take preapproval paperwork and information with you when you start shopping for a car. Knowing the preapproval amount can help you stay on track and within budget while shopping.

Getting a co-signer might be your best option to get a loan at a reasonable interest rate, especially if your income does not meet the minimum requirement or you have poor credit.

Your co-signer is responsible for covering your monthly payment if you can’t fulfill your loan obligations, so only take this approach if you are confident you can make your payments in full and on time. Using a co-signer lets you leverage that person’s credit score to get a better interest rate or loan terms.

» MORE: Co-signing a loan: pros and cons.

How bad credit affects your car loan

A credit score of 740 or higher typically gets you the lowest interest rate on an auto loan. Based on Experian’s average APRs for new vehicles, buyers with excellent credit can get a rate starting at 2.96%, but buyers with poor credit can expect rates starting at 12.84%.

Having an almost 10% APR difference can add up over the life of your auto loan. For example, if you bought a new $50,000 car with a 60-month loan and $5,000 down, here is how much it would cost depending on your APR.

  • Excellent credit - 2.96% APR: $808 monthly payment; $3,480 total interest paid
  • Poor credit - 12.84% APR: $1,021 monthly payment; $16,260 total interest paid

In this case, the higher APR costs over $200 more each month and over $12,500 more for the life of the loan.

If you do end up with a high APR loan, you don’t have to be stuck with it until you pay off your vehicle. Once your credit score rises, you can refinance your car to a better rate and save money.

What to avoid when shopping for an auto loan

Whether you wait to buy a car until your credit score is better or you are shopping despite your score, these are the red flags to watch out for.

"Buy here, pay here" lots

You might have heard commercials from local car dealerships targeting subprime buyers, but be wary. Those "buy here, pay here" dealerships generally charge more money for cars than they are worth.

"Buying a car from one of these lots won't necessarily hurt your credit score, but it won't help it either," said Ulzheimer. These lots typically don't report to credit reporting agencies, meaning your credit score remains the same even if you make all your loan payments on time and in full.

Misleading by verbal promises

It's easy to believe a salesperson, particularly when they're telling you things you want to hear about your car loan. Don't believe your car dealer or finance and insurance officer based solely on verbal promises. Make sure everything is in writing before you agree to the terms.

Costly extras

With a higher APR, you don’t want your loan to be any higher than it needs to be. Add-ons like extended auto warranties, gap insurance and credit life policies are all optional and could end up costing thousands of additional dollars over the life of your loan.

» MORE: Leasing vs. buying a car: Pros and cons

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    Can I get a car loan with a credit score of 500?

    Yes. Sometimes lenders set a minimum credit score they’re willing to work with, but this is on a lender-by-lender basis. There are lenders that work with scores of less than 500, and others that don’t have a set minimum score at all. While not impossible, it may be more difficult for you to secure a loan. You may have to shop around for the right lender or deal with less than ideal loan terms and interest rates.

    What is the lowest credit score to buy a car?

    There is not a set minimum credit score to be eligible to purchase a car. If you have a lower score or are considered a subprime buyer, you may still be eligible to take out a loan yourself or secure a car loan with the help of a cosigner.

    Does a large down payment offset bad credit?

    Not necessarily. Even if you’re planning on putting down a large down payment, your credit score still impacts the interest rate you’re approved for. However, the larger the down payment you’re able to save, the smaller the loan amount is. This helps you pay less interest over time. If it's an option, saving up a sizable down payment and taking out a smaller loan can be a smart solution worth considering.

    Bottom line

    It can feel like you don’t have any good options when you are desperate for a car but don’t have impressive credit. Ideally, waiting until your credit score improves or co-signing with someone will put you in a better financial position. If you do end up with a high APR car loan, refinancing when your credit score goes up will help.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Experian, “What Auto Loan Rate Can You Qualify for Based on Your Credit Score?” Accessed June 15, 2023.
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