Buying a car with bad credit

With car loans accounting for over $1 trillion in outstanding debt in the United States alone, Americans are clearly buying cars quite often.¹ In fact, recent statistics suggest that car loans represent at least 9% of the overall consumer debt market, and the average car loan payment is estimated to be around $460 per month.²

While these statistics show that most Americans purchase their vehicles through car loans, accessing these loans is commonly contingent on having a favorable credit situation. 

With this in mind, if you are currently going through a challenging financial situation, we understand that it may be difficult to find funding to buy a car, and for that reason, we’ve put together this list of tips for buying a car and bad credit loans.

How Are Credit Scores Calculated?

Let’s first talk about the basics of credit history and scores to help you understand why they are a determining factor when obtaining a car loan. 

Lenders use these scores to quickly evaluate a borrower’s creditworthiness. They are calculated based on certain variables:

• The borrower’s payment history.
• The age of their credit history.
• The diversity of the credit mix.
• The number of recent credit inquiries.

These variables are weighted differently depending on their degree of importance, and these values are ultimately combined to produce a total, which is known as a credit score.

The most common credit score used by lenders in the United States is the FICO score, which ranges from 300 to 850. 

The information required to calculate these scores is provided by credit reporting agencies, which are institutions that gather, organize, and report the data associated with a borrower’s credit accounts.

Lenders prefer to extend auto loans to individuals with a score higher than 660 since they carry a lower risk of incurring late payments or defaulting on their debt. While you may be approved for an auto loan with a credit score lower than that, there are a few aspects of your loan that will be affected if you have bad credit, including:

The Interest Rate 

If your credit score is lower than 639, the interest rate you can obtain on a traditional fixed-rate mortgage won’t be ideal. This shows how a low credit score can affect your cost of borrowing and how buying a car can be more expensive if you have bad credit, as the interest rates of your auto loan will be affected similarly.

The Length of Your Car Loan

The credit term of traditional auto loans typically ranges from 36 to 72 months, depending on the lender. Borrowers with bad credit, however, may face stricter terms due to being perceived as a higher risk by the lender. Some lenders may ask borrowers to repay their bad credit car loans in fewer than 24 months.

The Amount of Money Approved

Buying an expensive car with poor credit may be difficult as lenders might be reluctant to extend large amounts to individuals with a low credit score. That being said, while having bad credit puts you in a disadvantageous position when buying a car, it is not an impossible task. The following tips may help you increase the odds of getting approved for financing.

13 Tips To Buy a Car With a Bad Credit Score

These tips are intended to put you in a more favorable position before or during the process of finding funding to buy a car with bad credit. They can also help protect you!

Tip #1: Secure a Larger Down Payment

The amount of money potentially offered to you by lenders if you have low credit will probably be limited. One way to tilt the scale in your favor when buying a car with poor credit involves proposing a larger down payment.

If you’ve saved at least 30% to 40% of the price of the car, you will likely increase your odds of getting approved.

Tip #2: Pick a Car That Suits Your Financial and Credit Situation

Buying a brand-new car with low credit will likely involve high interest rates that could potentially be as large as the value of the car itself. If your credit situation is currently not at its best, consider shopping around for a car that fulfills your needs, not your desires. Your loan payments will be lower, and you can use any budget surpluses to fulfill other financial commitments.

Tip #3: Avoid Common Pitfalls With a Bad Credit Auto Loan 

When buying a car with bad credit, you’re more vulnerable to pitfalls that can hurt your financial situation further or lead you to unfavorable deals. Here are some common mistakes to avoid:

Common Mistakes	Description
Not Checking Your Credit Report First	Before shopping, obtain a copy of your credit report from all three major bureaus (Equifax, Experian, and TransUnion). This helps correct errors and understand your score.
Not Doing Proper Research	Research the average price of the car you’re interested in. An informed buyer is less likely to be taken advantage of.
Ignoring the Total Loan Amount	Instead of focusing solely on payments, consider the total loan amount. Longer loan terms can make payments seem attractive but may cost more overall.
Accepting the First Offer with Bad Credit	Even with low credit, don’t just accept the first financing offer. Shop around.
High-Interest Rates	Bad credit may result in higher interest rates, but exorbitant rates should raise concern.
No Down Payment	Buying a car without a down payment can lead to higher monthly payments and more interest over the loan term.
Overlooking Auto Insurance Costs	Insurance can be more expensive for those with bad credit. Ensure this is factored into your budget.
Rolling Negative Equity Into a New Loan	If you owe more on your current car than it’s worth, avoid rolling that negative equity into a new loan. This can result in paying for a car you no longer own.

Tip #4: Work on Your Credit

Unless you have been the victim of identity theft, there’s no easy or fast way to fix your credit score, but that doesn’t mean you can’t start reshaping your credit situation one punctual payment at a time. 

Before you start applying for auto loans, you could take a few months to put your finances in order by paying your financial commitments on time. Credit bureaus report financial transactions every 45 days, which means that your score will progressively improve as your accounts continue to show up as current. 

Tip #5: Look Around for the Lowest Interest Rates Available

Depending on your credit score, the average interest rate for auto loans may range from 4% to 20%. For individuals with poor credit (non-prime, subprime, or deep subprime), the rates are usually higher than 10%. While you can certainly find installment loans such as personal loan options, quick cash loans, and auto loans with a low credit score, they may be expensive. 

Use these rates to help you look around. Consider visiting local dealers, financial institutions, non-traditional lenders, or maybe even a close friend who may be willing to loan you the money at a lower rate than what lenders are offering. 

Knocking on a few doors could help you save money through lower interest rates, or it could also help you obtain more favorable terms if, for example, certain fees are waived.

Tip #6: Try To Limit the Number of Applications You Send

Constantly applying for a loan at different financial institutions will produce hard credit inquiries that will stay on your credit report for at least 24 months. If these inquiries show up within 12 months, they will negatively affect your overall score. 

Tip #7: Be Careful With In-House Financing from Car Dealerships

Most used car dealers will offer you financing on one of their used automobiles as a way to persuade you to pick a car from their lot. 

The cost of borrowing directly from them tends to be more expensive than traditional loans, as dealers are less interested in carrying the risk associated with lending money to individuals with poor credit.

The credit terms associated with this type of funding are usually shorter, and the APRs are commonly higher. Additionally, you may have to pay for several extra items to be eligible for this type of financing.

Tip #8: Use Your Pre-Approved Loan Amount as Your Starting Point

If you have already browsed through the available funding alternatives, you may have been pre-approved by one or more lenders for a certain amount for your car purchase. This amount could help you when choosing the right vehicle since you can add up your available down payment plus the pre-approved loan amount to calculate the maximum price you would be willing to pay for the car.

Additionally, since the loan has been pre-approved, you can spend less time looking at options that are outside your budget. 

Tip #9: Bring a Co-Signer on Board To Get a Car Loan With Bad Credit

If you have a friend or a relative who is willing to vouch for you during a challenging credit situation, your odds of getting approved for an auto loan will be significantly higher, especially if that person has a prime credit score.

If your budget is actually in good standing, and you can comfortably take on the payments associated with your auto loan, a co-signer can be a suitable alternative.

Tip #10: Consider Non-Traditional Lenders

Unfortunately, traditional lenders like a bank or credit union often demand high credit scores and a nearly perfect credit history to get approved for a car loan, which leaves individuals with poor credit short of alternatives. 

Applying for an auto loan at a non-traditional lender, such as a peer-to-peer lender (P2P) or a credit union, is an option you should consider if you are looking to buy a car with poor credit scores. Online lenders can also work with low credit scores.

Tip #11: Try Choosing the Basic Version of a Car 

If you are looking to buy a new or used car with low credit, adding extra features to it will end up increasing the amount of your poor credit loan and, consequently, the interest payments. If you really desire these add-ons, you could pay for them separately after you have completed the purchase, and preferably in cash if you can afford them. 

Tip #12: Desperation Is Your Enemy

While you may think that investing time in researching alternatives is just not worth it, getting desperate could lead you to make poor decisions that could end up affecting the stability of your personal finances, including potential scams intended to lure individuals with bad credit who are looking for the best bargain.

If you feel compelled to do business with a non-traditional lender, make sure you research them to confirm that their offering is sound and legitimate. 

Tip #13: Do You Really Need a Car Right Now?

Buying a car with a low credit score is expensive. Interest rates will be at least twice as high as those you can obtain if you have a higher score, and this makes them an alternative that you should only consider if you truly need to get one to fulfill your transportation needs.

FAQs About a Car Purchase With a Low Credit Score

Auto lenders use debt-to-income ratio to gauge your ability to manage monthly payments and repay loans. A high DTI suggests you might have trouble repaying the loan, which can lead to higher interest rates or loan denial. Conversely, a lower DTI is seen as less risky for lenders.

CreditNinja’s Thoughts on a Bad Credit Auto Loan

It is definitely possible to buy a car with a low credit score by browsing through the available alternatives the market has to offer. However, the cost of borrowing one is usually high, and some conditions may apply. 

By using CreditNinja’s tips described above, your odds of getting approved for a bad credit car loan should be higher, but the ultimate decision should be made based on your financial situation and your actual capacity to fulfill the payments associated with the loan. Having a higher down payment is always helpful. 

References:

1. U.S. car loans total $1.5 trillion. Why consumers are struggling | CNBC
2. 20+ Important Car Loan Statistics for 2023 | Fortunately
3. How Long Do Hard Inquiries Stay on Your Credit Report? | NerdWallet
4. How To Get A Car Loan With Bad Credit | Bankrate
5. What Is a Credit Utilization Rate? | Experian
6. U.S. Median Household Income Up in 2018 From 2017 | U.S. Census
7. Borrower Risk Profiles | Consumer Financial Protection Bureau