Getting a Car Loan with Bad Credit: A Realistic Guide

How Credit Scores Affect Car Loan Approval and Rates

Your credit report and scores are among the most important factors lenders consider when you apply for an auto loan. In general, a lower credit score means you'll face higher interest rates because lenders see you as a higher risk. The difference can be substantial: for example, Experian data from Q3 2024 shows average used car APRs of 18.95% for subprime borrowers (scores 501-600) and 21.55% for deep subprime (300-500), compared to 7.41% for super prime borrowers (781+). On new car loans, the subprime average was 13.18% for Q2 2024.

There is no universal minimum credit score required to get a car loan. Some lenders specialize in working with borrowers who have very low or even no credit history. However, the terms you receive—interest rate, loan amount, and repayment period—are likely to be less favorable than what a borrower with good credit would get.

• Typical credit tiers used by lenders: deep subprime (300-500), subprime (501-600), nonprime (601-660), prime (661-780), super prime (781+).
• Higher credit scores generally lead to lower annual percentage rates (APR) and more loan options.
• Lower credit scores often result in higher APRs, which can add thousands of dollars in interest over the life of the loan.

Sources: Experian, Consumer Financial Protection Bureau

Steps to Check Your Credit Report Before Applying

Before you start shopping for a car loan, it's important to review your credit reports from the three major nationwide credit bureaus—Equifax, Experian, and TransUnion. You're entitled to a free copy of each report every 12 months through AnnualCreditReport.com. Checking your own credit reports does not hurt your credit score.

Review each report carefully for errors that could be dragging down your score. If you find mistakes, you can dispute them with the credit bureau. Correcting errors could improve your credit standing and potentially lead to better loan offers.

• Request your free annual credit reports from AnnualCreditReport.com.
• Check for inaccuracies in personal information, account details, and payment history.
• File disputes online or by mail if you spot information that is incorrect.

Sources: Consumer Financial Protection Bureau

Improving Your Credit Score Before Applying

If your credit score is lower than you'd like, taking steps to improve it before you apply for a car loan can pay off. Even a modest improvement can move you into a better credit tier and lower the interest rate you're offered. For example, moving from subprime to nonprime can reduce your APR by several percentage points, according to Experian data.

Payment history is a major factor in your credit score, so making all your bill payments on time is crucial. Also, reducing the amount of debt you owe relative to your credit limits—your credit utilization—can help boost your score. While you're working on these steps, avoid opening new credit accounts or making large purchases on credit that could increase your debt load.

• Pay all bills on time, especially credit card and loan payments.
• Pay down existing debt to lower your credit utilization ratio.
• Avoid new credit inquiries and large purchases that increase your overall debt.
• Check your credit report regularly and dispute errors promptly.

Sources: Consumer Financial Protection Bureau, Experian

What to Expect When You Have Bad Credit

If you have bad credit, you can still get a car loan, but you should be prepared for certain realities. First, interest rates will be higher. For subprime borrowers, the average APR on a new car loan was 13.18% in Q2 2024, and on a used car loan it was 18.86% (Q3 2024). With deep subprime scores, used car loans averaged 21.55% APR.

The type of lender you use can significantly affect your rates and your likelihood of success. According to a 2021 CFPB report, banks and credit unions that made subprime loans tended to lend to borrowers with higher credit scores and financed more valuable vehicles compared to finance companies and buy-here-pay-here (BHPH) dealerships. Average interest rates at banks were about 10%, while finance companies and BHPH dealerships charged 15% to 20% on average. The report also found that the likelihood of a subprime loan becoming at least 60 days delinquent within three years was about 15% for bank borrowers, compared to 25% to 40% for finance company and BHPH borrowers.

Buy-here-pay-here dealerships specialize in financing for buyers with past credit problems, but they typically charge particularly high interest rates. While they may be an option if you struggle to find financing elsewhere, the higher costs and risks make them a last resort for many.

• Higher APRs and larger total interest costs are typical with bad credit.
• Banks and credit unions often offer lower rates than finance companies or BHPH lots for subprime borrowers.
• BHPH dealerships usually charge higher rates and may have lower credit standards.
• Shop around to compare offers from different types of lenders.

Sources: Experian, Consumer Financial Protection Bureau, MortgageCalculator.org

How to Find a Reputable Lender for Bad Credit

When you have bad credit, finding a lender who is transparent and fair is especially important. Start by checking with local banks and credit unions. Credit unions, in particular, may offer special programs for borrowers with poor credit. For example, Camino Federal Credit Union's Second Chance Auto Loan Program allows approved members to borrow up to $30,000 with terms up to 72 months and no prepayment penalty. Note that such programs have specific eligibility requirements and terms that can change, so contact the institution directly for current details.

Before you visit dealerships, get pre-approved by a bank or credit union. Pre-approval gives you a concrete interest rate and loan amount, which you can use as leverage when negotiating with the dealer or other lenders. It also gives you a clear picture of what you can afford and helps prevent you from being steered into higher-cost financing.

• Research banks, credit unions, and online lenders that serve subprime borrowers.
• Look for programs that offer transparent terms and no prepayment penalties.
• Get pre-approved from at least one lender to establish your baseline rate.
• Compare any dealer financing offers against your pre-approved rate.

Sources: Consumer Financial Protection Bureau, Camino Federal Credit Union

Alternatives to Traditional Financing

If traditional auto loans seem out of reach or come with very high rates, consider these alternatives.

A co-signer with good credit can dramatically improve your chances and lower your interest rate. Lenders use the co-signer's credit history when calculating the rate, so if your co-signer has a strong credit profile, your APR could be significantly lower. Note that the co-signer takes on the legal obligation to repay the loan if you default.

Another option is to save for a larger down payment. A bigger down payment reduces the loan amount and the loan-to-value ratio, which can help you qualify for a loan and secure better terms. It also reduces the total interest you'll pay over the life of the loan.

If you're a member of a credit union, check if they have special affordable loan programs for members with poor credit. Many credit unions are more flexible than traditional lenders and may offer lower rates and more personalized service.

Buy-here-pay-here dealerships are an option for buyers with very low credit, but they charge particularly high interest rates, as noted earlier. They may be less concerned with credit score but will pass on the higher risk through steeper costs. Use them only as a last resort after exploring other avenues.

• Co-signer: A trusted person with good credit can help you get a lower rate.
• Larger down payment: Reduces the loan amount and may improve approval odds.
• Credit union programs: Some offer 'second chance' auto loans with competitive terms.
• BHPH dealerships: Available but costly; consider only if other options fail.

Sources: Consumer Financial Protection Bureau, TransUnion, Camino Federal Credit Union, MortgageCalculator.org