Having a poor credit score certainly won’t make the car-buying experience any easier. It will likely require much more research, phone calls, and negotiating. But it is possible.
According to CNBC, the average price of a car loan as of May 2019 had climbed to $36,718, with high interest rates of around 6%.1 For most Americans, this is more money than they have on hand. In 2020 the Federal Reserve reported that only 64% of Americans had enough money on hand to cover a $400 emergency.2
Fortunately, if you’re interested in making a car purchase with financing, options are available to you, even with a poor credit score. Read on to learn more about getting a car loan and purchasing a vehicle with a poor credit history.
How Poor Credit Will Generally Impact Buying a New Car?
Having low credit can affect several aspects of the car-buying process. The first thing to figure out may be where your credit score falls.
When it comes to what’s considered “bad” credit, it can vary slightly depending on the scoring model being used, but here’s a general breakdown based on the FICO score, which is one of the most commonly used credit scoring models:
|FICO Score Range||Credit Rating|
|300 – 579||Poor|
|580 – 669||Fair|
|670 – 739||Good|
|740 – 799||Very Good|
|800 – 850||Excellent|
So, if we’re going by the FICO model, a score of 579 or below is typically considered “bad” credit. However, it’s essential to note that different lenders might have their own definitions of what constitutes “bad” or “good” credit. For instance, some might be more lenient and consider scores in the “fair” range as acceptable, while others might be stricter.
If you have bad credit, then it can make the car-buying process a little more challenging and likely more expensive. Here are some parts of the process that will be impacted if you don’t have good credit:
- It Can be Challenging to Find Auto Loan Lenders — When you have poor credit, finding lenders that want to work with you can be challenging. This is because having low credit shows lenders potential risk, and if your credit is extremely low, many lenders may not be willing to take on that risk.
- Stricter Loan Terms With Poor Credit — With low credit, you may have stricter loan terms than borrowers with better credit. You may find that lenders provide loan terms that work better for them rather than personalization.
- A More Expensive Loan — Borrowing money will likely cost more when you don’t have fair, good, or excellent credit. The higher your credit score, the chances are you will get the best rates, while lower interest will mean the opposite.
- You May Require a Larger Down Payment — A down payment for a car is an upfront payment you make when purchasing a vehicle, typically at a dealership. It’s a portion of the car’s total price you pay out of pocket right at the start. The rest of the car’s price is usually covered by a loan, which you’ll repay over time with interest.
With low credit, you will likely need a larger payment. And so, definitely, something to keep in mind before you begin your loan search. This may mean waiting a little longer to purchase a new car.
Options to Make Things Smoother With Bad Credit
Here are some things you may be able to do to help improve your chances of eligibility and, in some cases, get better loan terms:
Check Your Credit Report
Before applying, get a copy of your report from each credit bureau. And ensure there are no errors or discrepancies that might be dragging your score down. If you find any, dispute them to get them corrected.
Consider a Cosigner
Having someone with better credit co-sign your loan can significantly improve your chances of approval. However, remember that this person will be responsible for the loan if you default, so it’s a big ask.
Choose an Affordable Vehicle
Opting for a more affordable car can increase your chances of approval. Lenders might be more willing to finance a loan if the amount is lower and the vehicle is within your budget.
Prove Your Income
Lenders want to know you have a steady income and can make monthly payments. Providing recent pay stubs or other proof of income can help your case.
Work on Improving Your Credit
Even if you need a car now, there is always time to start improving your credit for the future. Make sure to pay all your bills on time, reduce outstanding debts, and avoid opening unnecessary new credit accounts.
Save for a Larger Down Payment
The more money you can put down upfront, the less you’ll need to borrow. A substantial down payment can show lenders that you’re serious about the purchase and can reduce their risk.
Car Dealerships That Work With Bad Credit
When it comes to getting a car loan, qualifications will likely vary depending on the dealership/financing company you use. There’s no industry standard for which credit scores to approve and which to deny. Individual lenders and dealerships make these decisions for themselves.
That being said, you may be able to get approved for an auto loan even if you have bad credit. And as touched on earlier, the terms you get will be better if your credit score is good. With bad credit loans, you’ll likely pay much higher interest rates. You also may not be offered as much money, and your monthly payments will likely be much higher as well.
We recommend doing plenty of research before making your decision. Call plenty of dealerships to find out what their rates are. Also, be sure to ask what kind of credit score you’ll need for approval.
Car Loans from a Private Lender, Bank, or Credit Union
Auto dealerships aren’t the only auto lenders options out there when applying for an auto loan, even if you have a poor credit score. Here are some other options you may be able to consider to finance your car purchase:
- Auto Loans From a Bank or Credit Union — Banks and credit unions are usually the first places that people may think of when they need funding. Although a low credit score can make getting funded from these financial institutions challenging, adding a cosigner may help.
- Online Auto Loan Lenders — Online auto loan lenders have become increasingly popular for auto loans due to their convenience and often competitive rates.
Buying a Car With No Down Payment
For many Americans, putting money down on a new car may be difficult. This is unfortunate because the more you can put down upfront, the lower your payments will be each month. Much like having a low credit score, the rates and terms you’re offered may be less favorable if you don’t put any money down.
It’s wise to save up some money so that you can make a down payment when purchasing a car. This will not only help you get better terms for a low-credit loan but will make your monthly payments more manageable.
If you can’t put any money down, you may be able to get better rates by using a cosigner. A cosigner is a third party with a good credit score who promises to make your payments if you should fail to do so. Usually, a cosigner is a close family member or friend.
Instant Approval Auto Loans
An instant-approval auto loan, or same-day auto loan, is one that you can apply for and get a decision on within the same day, usually as soon as the application is complete. Just like with any other loan, it’s important to shop around when considering an instant approval auto loan.
Make sure that if you’re going to apply for a same-day auto loan, you have all of your documentation ready to go. You’ll likely need a valid ID, proof of income, bank statements or credit/banking history, and proof of insurance, among other things.
The Process of Applying for a Car Loan With Bad Credit
Here’s a general overview of the process when applying for a car loan:
Determine Your Budget
Before applying for a loan, figure out how much you can afford to pay monthly. This will help you decide the loan amount and term that fits your budget.
Check Your Credit Scores
Your credit scores and credit history will significantly impact the interest rate you’ll receive. Knowing your score ahead of time can help you understand what terms you might qualify for.
Different lenders offer different terms and rates. It’s wise to shop around and compare offers from banks, credit unions, and online lending options.
Some lenders offer pre-approval, which allows you to see the terms you might qualify for without affecting your credit score (they won’t pull your credit reports). This can be a helpful step in the shopping process.
Apply for the Loan
Once you’ve chosen a lender, you’ll need to fill out an application. This typically requires personal information, employment details, financial information such as your debt-to-income ratio, and information about the vehicle you plan to purchase.
Review Loan Terms
If approved, review the loan terms carefully. Make sure you understand the interest rates, monthly payment, loan term, and any additional fees.
Finalize the Loan
Once you agree to the terms, you’ll finalize the loan. The lender will then send the funds to the seller or provide you with a check to pay for the vehicle.
After purchasing the vehicle, you’ll begin making monthly payments to the lender according to the agreed-upon schedule.
FAQS About Purchasing a New Car With Bad Credit
Here are some frequently asked questions about buying a new car through car loans with low credit:
Credit union options often offer more personalized services and may be more willing to work with individuals who have low credit. If you’re a member of a credit union, you can speak with a loan officer about your specific situation and explore bad credit auto loan options. They may offer more favorable terms compared to traditional auto lenders.
It’s wise to shop around and get quotes from multiple lenders, including banks, credit unions, and online lenders. Compare interest rates, car payments, loan terms, and any additional fees. Some online platforms allow you to fill out a single application and receive offers from various lenders, making it easier to compare.
Payment history is a critical factor in your credit report and can influence the ability to finance your car purchase, especially if you have bad credit. A history of timely monthly payment records can demonstrate financial responsibility and help you get a car loan, while late or missed payments may raise red flags for lenders.
Yes, many online lenders specialize in bad credit or no credit car purchasing. These lenders often have streamlined approval processes and may offer competitive rates. However, it’s essential to research and ensure that the online lender is reputable and offers terms that suit your financial situation.
You are entitled to one free credit report per year from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion). You can request your free report online through AnnualCreditReport.com. Reviewing your credit report before applying for a car loan allows you to understand your credit standing and correct any errors that might affect your loan approval.
While auto loans are the most common form of financing specifically designed for the purchase of vehicles, there are several other types of loans or credit lines that individuals sometimes use to finance the purchase of a car. Most of these are installment loans. Examples include personal loans, home equity loan options, in-house financing options, and 401k loans.
CreditNinja’s Thoughts on a New Car Purchase
Buying a car can be quite expensive. If you have a bad credit score or are currently struggling financially, you may want to consider buying a used car or leasing.
Many resources are available where you can find used cars in your area. And while a used car may not last quite as long, it can be an excellent temporary solution that costs you much less in the long run.