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How to Get a Car Loan with Bad Credit

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How to Get a Car Loan with Bad Credit

There is a possibility of getting an auto loan with poor credit, but it might be costly.

By Shannon Bradley Lead Writer | Personal finance, car purchasing, loans Shannon Bradley covers auto loans for NerdWallet. While in college, to earn a journalism degree, Shannon completed an internship that did not lead to the newsroom, but rather to a bank’s marketing department. She worked for the next 30+ years as a journalist and content manager in the field of financial services, creating educational material that covered a wide range of personal and business topics in finance. After being a NerdWallet reader for several years, Shannon welcomed the opportunity to become a writer for NerdWallet and help more people with financial decision-making. Shannon lives within Newburgh, Indiana.

17 January 2023

Editor: Des Toups Lead Assigning Editor | Student loans and repaying college debt, financing tuition costs for college Des Toups leads the student loans and auto loans teams at NerdWallet Prior to that, he headed NerdWallet’s private loans and consumer finance teams. He also managed teams of editors on CarInsurance.com, Insurance.com and MSN.com and was reporter and editor at The Seattle Times, Anchorage Daily News, Albuquerque Journal, Colorado Springs Gazette-Telegraph and Biloxi Sun Herald.

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Knowing what lenders look for can help you to secure a car loan at a lower cost.

In most cases being a bad credit holder, it isn’t a problem to get the right car loan.

But you’ll likely be paying more — via fees and interest rates that are higher as opposed to someone with good credit. That’s because lenders take on greater risk when they make the auto loan to someone with bad credit, so they charge more to compensate for the risk.

Here’s what you must know.

The steps to obtain an auto loan with bad credit

Although it can be difficult to be eligible for an auto loan in the event of bad credit however, you can increase your chances and possibly reduce the overall cost of your loan.

Review your credit score, and also your credit report.

When you are applying to get a vehicle loan, know the credit scores of your customers and where you currently stand. The two scoring models have a score range from 300 to 800. Credit tiers vary for each scoring model, but in general you will find higher rates, fewer offers and more lender scrutiny with scores below the mid-600s.

Credit score

APR average, new car

Average APR Used car

Superprime: 781-850.

3.84%.

3.69%.

Prime: 661-780.

4.90%.

5.47%.

Nonprime: 601-660.

7.25%.

9.81%.

Subprime: 501-600.

10.11%.

15.86%.

Deep subprime: 300-500.

12.93%.

19.81%.

Source: Experian Information Solutions.

While some auto lenders also employ an industry-specific FICO method, your basic credit report and score can give you an idea of what kinds of loan deals to look forward to. It is free to access through NerdWallet, or you can receive one free credit report every calendar year through each bureau .

Once you have an accurate credit history, look at ways of improving the data that lenders will consider to determine if you qualify and at what rate. Are there errors you can correct, such as accounts with past due payment that were actually in time? Are you in possession of delinquent accounts that you can bring up to date? Do you have low-balance accounts you can settle?

Auto lenders with bad credit

Min. credit score 620

Min. credit score None

Min. credit score 575

Est. APR 5.74-18.54 Percentage

Est. APR 3.90-27.90%

Est. APR 3.94-21.00 percent

Loan amount $7,500-$500,000

Loan amount $1,000-$100,000

The loan amount is $8,000 to $100,000.

>> MORE:

Be able to afford loan repayments

Lenders consider more than just your credit score. They search for indicators that show you are able to make payments on time and won’t default on the loan.

For instance, a loan provider will check to see if you have had auto loans in the past and paid them back promptly. If you have, that’s a strong positive factor in your favor. A repossession can be a huge negative.

Be ready to answer lender requests for documents regarding the following:

Sources of income . Provide evidence of income and employment in the form of a pay stub showing year-to date earnings, if you can. For borrowers with bad credit the lenders will require one source of income that is steady through employment. There are some lenders who will consider other income sources like children’s support payments, Social Security benefits or disability payments — but they are not the sole source of source of income. On average, most lenders require an income gross of at least $18,000, though there are lenders who go lower or have no minimum.

Debt-to-income ratio . Lenders will take a look at you (your month-long debt obligation, divided by your gross income). You may have trouble finding a loan if your DTI is greater than 45 to 50%. If you’ve paid off your debts and are in a lower debt level than your credit score suggests you should be able to prove this.

Credit utilization . If you are using loans as well as credit card accounts, what percentage of your credit are you making use of? Lenders typically want to see those who use less than 30 percent of their credit. If your credit usage appears to be greater, however you have recently paid off your the balance, make sure you have proof of that.

History of payments . Your history of making payments on time, particularly for auto loans, is a major element when lenders take loan decisions. Make sure you can explain the circumstances of any late payments, and the reasons why it is unlikely to happen once more.

Payment-to-income ratio . This is a different measure of your financial capacity to make the cost of a car loan, as well as insurance for your car. Your PTI rate is calculated as a result of adding the estimates of your car loan and car insurance payments, and dividing that total by your income per month. Ideally the ratio should not exceed 20%.

Showing you can afford to pay for car loans helps with much more loan approval. It can also help you get a lower interest rate and better loan conditions.

The amount you borrow will be less than the amount you’ll need to be able to

When deciding whether to accept the approval of a car loan the lender will consider their potential loss if you stop making payments or completely destroying the vehicle. If you can minimize that chance of loss by borrowing less, you can improve your chances for loan approval. In addition to purchasing the cheapest vehicle, here are some alternatives to borrowing less:

Make a down payment. Some lenders will require an upfront payment, particularly for those who have bad credit. Even if they don’t require it, you should put some of your own money into the loan deal if you can. Along with decreasing the amount you’ll need to finance by a down payment, it also signals to a lender that are committed to paying off the loan.

Transfer your car to a different. If you’re able to trade-in your vehicle make sure you check car value guides, like Kelley Blue Book and Edmunds. Be prepared to leave less to finance.

Have a co-signer lined up

A co-signer can be someone with good credit and who agrees to make payments if you default on the loan. They provide a safety net for lenders that improves your odds to get loan approval. Some lenders will require a cosigner when you apply for of bad-credit auto loans.

A co-signer has no ownership rights in the car however they risk their credit score if they fail to pay or stop payments completely.

A co-borrower could increase your chances of approval. The co-borrower owns the vehicle, and is also responsible for paying the loan.

Comparing lenders to get a bad credit auto loan

Do not choose the first lender to offer you a loan. Certain lenders profit from bad-credit borrowers who are desperate to purchase a car, saddling them with high interest rates as well as fees and costs of services hidden in the loan contract. If you don’t evaluate the offers of lenders, you’ll never be able to determine if you could have made better decisions.

Go to your financial institution or bank first, or read online reviews and locate auto lenders with a low — or no — minimum credit score minimum requirement. Do this before you ever go to a dealer. In the end, your aim is to receive qualified loan offers from multiple lenders.

What might seem like an insignificant difference in interest rates could make a an enormous difference in the amount you’ll pay. If you have a car worth $25,000 financed for 60 months at 9%, the payment is $518. If you choose 14%, it’s $581. In the course of the loan the difference will be more than $3700.

An aids you in comparing the cost of all your loan alternatives.

Alternatives to paying more for a auto loan

If you’re not able to qualify for a bad-credit auto loan or the rates are too high, the best choice is to put off purchasing a car, if you are able. Use this time to improve your credit, pay down other debts , and save cash for .

If you’re in need of a car now and can’t delay buying a car, your only option may be to opt for an expensive loan. In this case, you should focus on making your loan payments punctually.

After you have a six- to 12-month record of timely payments, you can look into . Consider applying to multiple lenders as they have different requirements, and one may be willing to refinance at an lower rate, but another isn’t.

The author’s bio: Shannon Bradley covers auto loans for NerdWallet. She has spent more than 30 years in banking as a writer of financial education content.

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