It's generally best to work on improving your credit before applying for a car loan if you're thinking about buying a car and have bad credit. If time isn't on your side, however, it's important to take steps to evaluate your situation and budget and make yourself as attractive a borrower as possible.
Steps to Get a Car Loan With Bad Credit
Having bad credit, which usually means a credit score under 580, can limit your options to finance a car, but some lenders are willing to work with buyers who have low credit scores. Here are some steps you can take to improve your odds of getting a loan.
1. Check Your Credit Score and Credit Report
Your credit score has a significant impact on your ability to get approved for a car loan, as well as the terms of your financing.
As a result, it's important to check your credit score and review your credit reports to gauge your overall credit health. If you have some time before you need to buy a car, look for areas you can address, such as paying down credit card balances or getting caught up on past-due payments, to potentially improve your credit score before you apply.
Here's a look at the average rates for borrowers, according to Experian's State of the Automotive Finance Market report for the first quarter of 2024:
| How Your Credit Score Affects Car Loan APRs | ||
|---|---|---|
| Credit Score Range | Average APR for New Car | Average APR for Used Car |
| Deep subprime (300 — 579) | 15.62% | 21.57% |
| Subprime (580 — 619) | 12.85% | 18.97% |
| Near prime (620 — 659) | 9.62% | 13.72% |
| Prime (660 — 719) | 6.89% | 9.04% |
| Super prime (720 — 850) | 5.38% | 6.8% |
Source: Experian State of the Automotive Finance Market; scores calculated using VantageScore® 4.0
2. Know How Much Car You Can Afford
The average auto loan balance was $23,792 in 2023, according to Experian, which can be very costly if you can't qualify for a low interest rate. The average monthly payment exceeds $700 for new cars and tops $500 for used cars.
Before you start shopping around for a car, consider how much you can afford to pay. In addition to the monthly loan payment, you'll also need to consider:
- Title and registration fees
- Insurance premiums
- Fuel costs
- Maintenance and repairs
- Miscellaneous costs, such as parking
Take a look at your budget to get an idea of what you can comfortably afford without sacrificing other financial goals or obligations. If you currently own a car, consider how trading it in or selling it could help lower your costs.
Remember, though, that while getting on a longer repayment term can reduce your monthly loan payment, it'll result in higher total interest charges, which can be especially detrimental to your finances if you have a high interest rate.
How Loan Amounts Affect Total Interest Paid
If you are looking for a used car and have bad credit, the total amount you pay for a car can be very high depending on the amount you finance. In the example below, if you were to get a 60-month loan for $10,000 at 21.6% APR as opposed to the national average near $24,000, you'd save 42% or about $9,000 of your money on the total amount of interest paid.
| How Interest Paid Differs on 60-Month Auto Loans | |||
|---|---|---|---|
| Loan Amount | Monthly Payment | Total Interest Paid | Total Amount Paid |
| $24,000 | $657 | $15,444 | $39,444 |
| $10,000 | $274 | $6,435 | $16,435 |
Learn more >> Car Payment Calculator
3. Save for a Down Payment
With poor credit, it's likely that lenders will require a down payment to get approved—often a minimum of 10% of the sales price, which can be thousands of dollars, depending on the vehicle you want.
However, the more money you put down, the better your chances of getting a lower interest rate because a larger down payment reduces risk to your lender. Additionally, borrowing less can further reduce your monthly payment.
Coming up with a down payment isn't always easy, though, so you may consider delaying your car purchase to save for a larger one. If you don't already have one, consider opening a high-yield savings account and setting a goal for your down payment fund. Then, work toward it based on your ability to save.
Learn more >> How Much of a Down Payment Should You Make on a Car?
4. Compare Auto Loan Offers
After you get all your finances in order and you're ready to apply for a loan, take some time to shop around first. Potential options include:
- Captive financing: When buying a new car, you may be able to finance the purchase directly with the manufacturer.
- Dealer-arranged financing: Many dealers work with a variety of lenders to help you obtain a loan for your vehicle. Once you apply, you may get several loan options from which you can pick the one with the best terms. However, dealers may tack on a margin to your interest rate as compensation for the service.
- Banks and credit unions: Traditional banks and credit unions may offer direct auto loans, where you receive a preapproval that you can take to the dealership. This could be a good option for people who already have an established relationship with a bank or credit union, as they may overlook blemishes in your credit history and use your experience with their institution as evidence of your creditworthiness.
- Online lenders: Many online lenders can offer low interest rates on auto loans because they don't have the overhead costs of a physical branch network. These lenders also typically offer prequalification, which allows you to see potential offers without impacting your credit score.
- Buy here, pay here (BHPH): BHPH dealers specialize in working with people that have no credit or poor credit by offering in-house financing. However, there are many downsides to this type of financing, including high interest rates, high down payment requirements and a potentially limited vehicle selection.
As you search for the loan with the best terms and lowest interest rate, you may end up applying with several lenders. To minimize the potential impact on your credit score, try to complete your rate-shopping process within a short period.
Learn more >> How Does Financing a Car Work?
5. Consider Getting a Cosigner
A cosigner is a person who agrees to apply for a loan with you and make the loan payments if you can't. Having a cosigner with a good credit score, strong credit history and stable income can improve your odds of getting approved and securing favorable terms.
Due to the financial commitment a cosigner takes on, it's crucial that you only consider people with whom you have a good relationship. That may include a parent, sibling, spouse or close friend.
Learn more >> Should You Get a Cosigner on a Car Loan?
Frequently Asked Questions
Yes, it's possible to finance a vehicle purchase with a 500 credit score or even below that. Keep in mind, though, that you can generally expect limited options, as well as high interest rates and fees. If possible, try to improve your credit before applying.
Each lender has its own criteria for evaluating applicants, so there's no universal definition of what credit score you should have. However, to maximize your chances of getting a low interest rate, it's best to have a credit score of 720 or above.
If your situation isn't urgent, it's best to take some time to improve your credit before applying for a car loan—preferably while also building your down payment fund. Here are some steps you can take to increase your credit score:
- Review your credit reports. Your credit score is calculated using the information found in your credit reports, so if you want to know which areas of your credit file need to be addressed, go to the source.
- Pay your bills on time. If you're not already doing so, make it a priority to always pay your bills on time. If you're behind on payments, getting caught up can help minimize further damage to your score and help your credit health recover.
- Pay down credit card balances. If your credit card balances are high relative to their credit limits, paying them down can reduce your credit utilization rate and improve your credit score.
- Get credit for non-debt payments. Experian Boost®ø is a free tool that allows you to add certain non-debt payments to your Experian credit file. Link your financial accounts, and you may be able to add rent, utility, phone, insurance and even some streaming subscription payments, which can potentially increase your FICO® Score☉ .
- Minimize credit applications. While you're working toward an auto loan application, it's critical that you avoid applying for other forms of credit in the meantime unless it's necessary. Applying for and opening credit accounts can negatively impact your credit score and also increase your debt-to-income ratio, which can hurt your approval odds.
Build Your Credit to Improve Your Future Financing Options
It can take time to rebuild a bad credit score, so while you may be stuck with a high-interest auto loan right now, that doesn't need to always be the case.
After you receive your auto loan, continue to monitor your credit for opportunities to build and maintain a good credit history. If you have some negative items on your credit report, their impact may diminish over time, especially if you demonstrate good credit habits going forward.
As your credit score improves, you may have an opportunity to refinance your auto loan at a lower interest rate, or at least qualify for a more affordable auto loan the next time you buy a car.
