If you need a car to commute to work or school, opting for a used vehicle is an excellent way to save money. However, used cars are still a significant investment. The average used car costs over $20,000 today, so you may need to take out a loan to finance your purchase.
Lenders typically want borrowers to have credit scores of 661 or higher. If your score is below that, they consider you a nonprime, subprime, or deep subprime borrower, making it more difficult—but not impossible—to qualify for a loan. Here's what you need to know.
- Your credit score is a major factor in determining whether you qualify for a car loan.
- Auto loan lenders generally look for borrowers with credit scores of 661 or above.
- Individuals with scores below 661 can qualify for financing but will likely pay much higher interest rates.
- Some lenders specialize in loans for people with fair or poor credit.
- You can qualify for a loan and potentially get a lower rate by making a larger down payment or adding a co-signer to your loan application.
5 Ways to Get a Car Loan with Poor Credit
Here are five things you can do to improve your odds of getting a car loan if you have bad or fair credit.
1. Improve your credit first
Before you go shopping for a car, focus on improving your credit as much as possible. For example:
- Pay your bills by their due dates. Your payment history makes up 35% of your credit score. By making all of your payments on time every month, you can boost your credit score.
- Reduce your account balances. Your credit utilization, or how much of your available credit you are using at any given time, accounts for 30% of your credit score. You can improve your credit by paying down your credit card or loan balances.
- Ask for higher credit limits. Call your credit card companies and request a higher credit limit. If you're approved for a higher limit, your credit utilization will improve.
- Dispute errors on your credit reports. Errors, such as payments you made on time but that were reported as late and fraudulent accounts opened in your name, can damage your credit. Review your credit reports for free at AnnualCreditReport.com and dispute any inaccurate information with the credit bureaus. All three major credit bureaus—Equifax, Experian, and TransUnion—explain how to do that on their websites.
By following those steps, you could increase your credit score in as little as 30 days.
2. Save up for a down payment
The lower your credit score, the less likely you are to get a loan large enough to finance the entire purchase price of a car (assuming you can get a loan at all). So it's smart to save up for a substantial down payment.
Car industry experts often recommend a down payment equal to 20% of the car's purchase price, although many buyers put down less than that. However, putting even more money down can help you get a loan and a smaller monthly payment.
3. Look for an inexpensive vehicle
Though you may dream of a spacious SUV with all the latest features, it can be difficult to get a loan to pay for if you have poor credit.
Instead, focus on inexpensive vehicles that are more modest but still reliable. Opting for a smaller, entry-level vehicle over a larger or more luxurious one increases your chances of qualifying for auto financing.
4. Shop around
Rates on car loans can vary widely, so it’s a good idea to compare multiple lenders before applying for a loan.
If possible, avoid applying for financing at the dealership. If you have bad to fair credit, you’re likely to be better off securing a car loan on your own by shopping around and comparing loan terms. There are several types of lenders to consider:
- Credit unions. As nonprofit organizations, credit unions often have better rates and less-stringent borrower requirements.
- Banks. If you have a relationship with a local bank, you may be more likely to qualify for a loan there than at another lender.
- Online lenders. Many online lenders specialize in car loans for people with less-than-perfect credit.
- Buy here, pay here dealers. If you struggle to get approved for a loan elsewhere, a "buy here, pay here" dealer may be willing to work with you. However, expect higher interest rates on these types of loans than you’d find from other lenders.
5. Ask a co-signer to apply with you
You can increase your chances of getting a loan by adding a co-signer to your application. You can ask a parent, relative, or friend to co-sign your car loan. If they have good credit and a reliable income, you should qualify for a loan with a lower interest rate than you'd find on your own. Bear in mind, however, that you'll be putting them and their credit scores at risk if you're unable to make the payments.
Repaying, Refinancing Your Car Loan
If a lender approves you for a loan despite a poor credit score, try to come up with a repayment plan to minimize the interest charges. By making extra payments, you can reduce how much interest accrues, save money, and pay off your debt sooner. As your credit score improves, you may also want to consider refinancing your car loan to get a lower interest rate.