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 $27,000 as of November 2021, 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.
Dealerships are often happy to find financing for you because they take a commission on top of the lenders' rate, sometimes up to 4%.
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.
In addition to potentially finding better rates than at the dealership, securing financing yourself opens the door to private party sales and auto auctions. With a variety of sales aggregator sites such as Cars.com, Edmunds.com, or Autotempest.com, buyers can find individuals that may have better prices on vehicles without the overhead of a dealership. Facebook Marketplace has also become a platform for auto sales, especially for private party sales.
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 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. Check your loan agreement to see if an early payoff is an option. By making extra payments, you can reduce how much interest accrues, save money, and pay off your debt sooner.
Making regular, on-time payments on an auto loan can help to increase your credit score. As your credit score improves, you may also want to consider refinancing your car loan to get a lower interest rate. With a higher credit score, you'll find more attractive rates available.
Credit Score and Car Loan FAQs
Can I Get a Car With a Credit Score Under 500?
Yes, but it may take some work to do so. There are lenders that accommodate those with bad or no credit but they come with extremely high-interest rates and fees. A "second chance" car loan, also known as a sub-prime auto loan, might be your best option. These lenders specialize in those with extremely low credit scores, bankruptcies, or repossessions on their credit report.
Many established banks offer second chance loans, which may carry higher interest rates. You may also find sub-prime auto loans at "buy here, pay here" dealerships, where payments are made directly to the dealership.
Can You Build Credit by Financing a Car?
Yes and no. Financing a car can build your credit over time, but it may initially lower your credit because you've taken on this new debt. The way to build credit when you finance a car is to make your payments on time. If you're not able to do this, financing a car will hurt your credit.
Can You Finance a Car if You Have No Credit?
Having no credit will bring the potential buyer many of the same challenges as the person with poor credit. Your best options are to find a co-signer with established credit, increase your down payment, or see whether you qualify for any special loan programs.
Will Dealers Limit the Selection of Cars if I Have Bad Credit?
Very possibly. According to the used car dealership DriveTime.com, it’s not uncommon to hear stories about people with bad credit being shown a different selection of cars than other buyers. Ask the dealer in advance if you will have any vehicle restrictions and what type of car you can expect to qualify for.
The Bottom Line
A suboptimal credit score will definitely make it harder—but not impossible—to get a car loan. The steps to securing financing for this purchase are similar to any other purchase. Figure out your budget. Do the work to find out your credit score. If there are errors on your score, fix them. Make the biggest down payment you can manage. This benefits you in two ways: It can help convince lenders you are committed to paying on time. That larger down payment also means a smaller loan amount, which in turn means less interest on the loan. Choose an affordable car. Apply to several lenders.
Typically, lenders want borrowers to have credit scores of 661 or higher. If your score is lower than that, you're considered a nonprime, subprime, or deep subprime borrower, and you'll have to work more diligently to build up credit and get the loan.