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How to get a car loan with bad credit

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This content is created by AP Buyline in accordance with APโ€™s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partnersโ€™ links in this content. Learn more about AP Buyline here.

edited by Lynnae Freeman
ย |ย 
Updated July 21, 2024

In a nutshell

Consumers with bad credit may still qualify for an auto loan, but improving your credit is still the best way to finance a car.

  • Car loans provide financing for most (or all) of the costs associated with buying a new or used vehicle.
  • The better an applicantโ€™s credit score, the better their approval odds.
  • Bad or no credit borrowers may qualify for loans with higher interest rates or fees.
  • Getting a cosigner, saving for a larger down payment and shopping around can cut the costs of your loan.

How a car loan works

A car loan is a type of financing in which a lender gives you (the borrower) money to buy a car, truck or other vehicle. You may choose to get financing from a lender directly and use the loan payout to buy a car anywhere you choose. You can also get financing through the car dealer using the dealer's preferred lender.

You agree to repayment terms with your lender. These include the number of payments to be made, the length of the loan repayment and the annual percentage rate (APR) for the loan.

Your vehicle often serves as the collateral for the loan, securing it in case you stop paying and default on the loan. If you can no longer make payments, the lender can repossess the vehicle to recoup their losses.

A car loan may not always cover the full purchase price of the vehicle. The auto dealer or seller may request a cash down payment before transferring possession of the car. The remaining balance (after the down payment) is then financed through the loan.

How bad credit affects your car loan approval

The terms and cost of an auto loan vary a lot depending on the lender's policies and your creditworthiness. Generally, having a better credit score helps you qualify for lower interest rates and a smaller down payment. Good credit may also give you access to a larger loan and the ability to buy a more expensive car. Conversely, getting a car loan will be difficult if your credit score is very low or you have a very limited credit history.

How to apply for a car loan with bad credit

Even though getting an auto loan can be more difficult for someone with bad credit, it's not impossible. Here are a few tips to consider if you are a potential borrower facing this challenge:

1. Save as much cash as possible

If you don't need a car immediately, take some time to save for a down payment. The larger the down payment you can provide, the smaller the loan youโ€™ll need. A bigger down payment improves your chance of approval because smaller loans are more easily approved. It also reduces the price you'll pay over time in interest.

2. Shop around

While you can ask the car dealer to help with financing, this may limit you to working with their choice of lenders. By researching lenders ahead of time, you can see what's out there, including how much interest you may have to pay and what loan terms you can get with your credit profile. Many lenders offer a quick prequalification process to help you see loan terms without harming your credit report.

3. Fill out the application completely

When you've selected the right lender and are ready to apply, gather all the documentation you need beforehand. The lender may ask for details about your employment situation or other forms of income. Be sure to include any information supporting your ability to repay a loan and be honest about your finances.

4. Ask for help

If you still cannot get a loan on your own, it may be time to get assistance. If you know someone with good credit who is willing to cosign a loan for you, the lender may be more open to approval. It can also give you access to better rates and loan terms than if you applied yourself.

Alternatives to paying more for a bad credit auto loan

Loans can be expensive, especially if you donโ€™t have great credit. You shouldn't feel locked into an agreement that you can't afford or that charges too much interest in fees. Other options may include:

  • Applying for loans from a credit union or community bank. They may offer more competitive rates to their members.
  • Saving more cash for a down payment so you can borrow less through a loan.
  • Trying to improve your credit score so you get access to better loan terms and rates.

Tips to improve your chances

1. Check your credit

How do you know that you have bad credit? What credit areas need work? Without seeing your full credit report and credit scores, you wonโ€™t understand what made you a bad credit risk in the first place. Before you apply for a loan, check your credit report and see if there are areas you can quickly improve.

2. Make changes

Some negative marks on your credit card can take a long time to resolve. A bankruptcy, for instance, may take years to fall off your report. However, the sooner you start taking actions that will positively affect your score, the better. Making on-time payments, paying down existing debt and avoiding new debt can all bring your score up over time.

Itโ€™s also possible that not every bad mark on a credit score is your fault. Mistakes happen. When checking your report, look for items you donโ€™t recognize. You can then contact the respective credit reporting agency to dispute any errors.

3. Pick a cheaper vehicle

Another option may be to choose a car or truck that costs less. Getting approved for smaller loans is often easier, especially with bad credit. While it may not be the car of your dreams, the cost difference could be enough to get you approved and driving off the lot with a dependable ride.

The AP Buyline roundup

If you have bad or limited credit, you may still qualify for a car loan. Just expect to put in some work before you buy. In addition to reviewing your credit history and making some changes, comparison shopping is the best way to find loan terms that work for you.

Frequently asked questions (FAQs)

Can I get a car loan with no credit?

While getting a loan with no credit is more difficult, it still happens. Lenders and banks may be willing to approve you if:

  • You have a larger down payment.
  • You have a cosigner for the loan.
  • You can demonstrate a dependable income to cover the loan.

Remember, some lenders deal specifically with borrowers who haven't taken out a loan or credit before. These lenders are more willing to take a risk, but charge more in interest and fees for the privilege.

How much down payment is needed for a car loan with bad credit?

Each lender has its own requirements for bad credit loans and will make a decision for each buyer based on that person's credit history and financial situation. A down payment amount for one borrower may not be enough for another. Some car dealers promote "no money down" loans for those with bad credit, but the lenders they work with charge more for interest and fees.

That said, a good number to aim for is 10% of the car price. If you can come up with more than that, you increase the odds of getting a โ€œyesโ€ and may get a better rate, too.

What is the average interest rate for bad credit car loans?

Interest rates for auto loans change frequently; the only way to know what a lender charges is to check rates on the day you apply. However, borrowers with bad credit can expect to pay the highest interest rates, with a higher rate for used cars than new ones. To get the lowest rate for your credit rating, compare loan offers and get preapproved before you buy.

Can I get preapproved for a car loan with bad credit?

Yes, itโ€™s possible to get a preapproval on a car loan, even with bad (or no) credit. The preapproval process also helps you see if you can get a loan while you shop around for the best rates. Both car dealers and lenders have preapproval options. Most preapprovals don't affect your credit score, so compare offers and pick the one that best meets your needs.

This content is created by AP Buyline in accordance with APโ€™s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partnersโ€™ links in this content. Learn more about AP Buyline here.