How To (Easily) Get A Car Loan With Bad Credit [2024]

Embarking on the journey to finance a car with bad credit demands strategic know-how and expert guidance. In this guide, we’ll explore effective strategies and valuable insights on how to finance a car with bad credit.

Whether you aim to improve your credit or seek practical solutions, we’ve got you covered on the journey to securing a car loan.

Understanding Credit Scores in Car Financing

Your credit score provides a quick view of your financial reliability and helps lenders assess the risk involved in giving you a loan. 

Generally, higher credit scores are linked to reduced interest rates and better loan terms, making the overall cost of financing more manageable. Conversely, those with lower scores may encounter higher interest rates and less favorable conditions. 

Q: What is the lowest credit score to finance a car?

Usually, you’ll need a credit score of about 600 or higher for a regular car loan. But this can change depending on the lender. If your score is below 600, you might have fewer options. Further details on this are discussed below.

>> Read up on Raise Your Credit Score: Complete Guide

Auto Financing with Challenged Credit: Your 4-Step Guide


Step 1: Assessing Your Financial Situation

Firstly, understand credit score and how lenders use it to judge your trustworthiness for loan repayment.

The two main scoring systems that lenders use are FICO and VantageScore. Their credit score ranges from 300 to 850. For both systems, a credit score below 600 is considered a “bad credit score.” 

A poor credit score could result in limited loan options, higher interest rates, and closer scrutiny by auto lenders and traditional banks through thorough credit checks.

  • Individuals with credit scores above 600 typically face average interest rates ranging from 2.4% to 6.7% for new car loans and average interest rates of 3.7% to 10.4% for used car loans. Higher credit scores often enable them to secure larger credit amounts.
  • Individuals with credit scores below 600 (subprime credit and deep subprime credit tier), the average new car loan interest rates range from 10.8% to 14.7%, while average rates for used car loans range from 17.2% to 20.1%.

Tip: If your loan has a high-interest rate due to your credit score, choose a shorter loan term. Even though monthly loan payments will be bigger, it helps in the long run since you won’t be paying high-interest rates.

Secondly, you should evaluate your financial and credit status. 

Calculate the money you can responsibly allocate to the overall cost of car ownership (including insurance, parking expenses, registration, and taxes) by comparing your monthly income with expenses. This establishes a practical budget, ensuring financial stability.


Assess your credit profile by getting free annual credit reports from major US credit bureaus (Equifax, Experian, TransUnion). Use any of these methods:

  • Online: Visit AnnualCreditReport.com and fill out the form.
    Update: Free weekly online reports are now available.
  • Phone: Call 1-877-322-8228, follow the prompts, and provide information.
  • Mail: Download the ‘Annual Credit Report Request form’ from AnnualCreditReport.com, complete it, and mail it to each credit bureau’s specified address.

Upon receiving your credit report, scrutinize it for inaccuracies or signs of fraud. If you find any negative items that can be disputed or removed, act promptly. A clean and accurate report often results in a higher credit score, boosting your chances of securing favorable loan terms.

>> Learn more in our in-depth guide on deleting negative items from credit reports.

Step 2: Exploring Car Financing Options

When it comes to financing a car with less-than-ideal credit, there are several ways available, each tailored to accommodate specific credit circumstances. 

  • Traditional Auto Loans: These are the standard loans banks, credit unions, and traditional auto lenders offer. While they often require better credit scores for favorable terms, they remain an option for those with slightly damaged credit.
  • Bad Credit Auto Loans: Specifically designed for individuals with poor credit, these loans come from lenders specializing in working with borrowers facing credit challenges. They consider other factors beyond credit score, such as income and down payment.
  • In-House Financing from Dealerships: Some dealerships offer financing directly to qualified buyers. This can benefit individuals struggling with credit issues, as dealers may have more lenient approval criteria.
  • Secured loans: These types of loans ask for collateral, something valuable as a promise. Collateral reduces risk for the lender, potentially leading to more favorable terms.
  • Unsecured Loans: These loans can be convenient because they don’t require collateral, but they usually have greater interest rates to compensate for the risk.
  • Subprime Lenders: These lenders specialize in providing auto loans for people with poor credit. While they offer financing, the interest rates are generally higher due to the increased risk they assume. We do not recommend them to most people. 
  • Online Lenders: Online lenders for bad credit car loans have flexible Credit Score Requirements, making auto financing accessible to those with imperfect credit. They simplify the application process for a convenient solution.

Step 3: Improving Your Chances

Specific actions can boost your loan approval odds and create a favorable impression with lenders. Remember two key points:

Be a better debtor

Building/Rebuild Your Credit Score: Initiating efforts to rebuild or strengthen your credit rating can significantly improve your loan eligibility. Paying off credit card balances, managing a diverse credit mix, on-time bill payments, and minimizing outstanding debts can gradually improve your creditworthiness and credit score over time.

Reduce Existing Debts: Lowering existing debts or settling overdue debts can demonstrate financial responsibility and positively influence lenders’ perceptions. Creating a debt repayment plan and consistently making payments is an excellent place to start.

Show Your Ability to Afford Loan Payments: Be prepared to respond to lender requests for documentation demonstrating your financial capacity to manage loan payments. These may include sources of monthly income, debt-to-income ratio (DTI), credit utilization, payment history, and payment-to-income ratio (PTI).

Have Co-Signers: Having someone with good credit co-sign your loan can boost your chances of approval and attractive rates. But remember, both of you are responsible for paying back the loan. If the payments are late, it can hurt the co-signer’s credit score, even if they don’t own the car.


Ask for less

Trade-in Your Current Car: Check guides like Kelley Blue Book and Edmunds to know its value if you have a car to trade in. The two resources help you figure out its worth. Skillful negotiation with dealers can decrease the amount required for your new car loan, leading to improved loan terms and a more favorable overall deal.

Consider Down Payment: A substantial car financing down payment can offset a less-than-perfect credit history. Demonstrating your commitment by contributing more upfront shows your seriousness and might lead to more favorable terms.

Choose a Realistic Car Within Your Budget: This step is crucial. Picking a car that fits your budget means you can easily handle the monthly payments. When lenders see this, they’re more likely to loan you since you’re asking for less. 

Step 4: Applying for a Bad Credit Auto Loan

Have you already chosen the type of auto loan that best suits your needs? If not, research and find the best bad credit car loans with low interest rates. Once you have chosen, it is time to proceed to the next step. 

Gathering Necessary Documentation: Lenders will require specific documents to assess your eligibility. These may include proof of income, employment verification, personal identification, and potential references. Having these documents ready streamlines the application process.

Filling Out Loan Applications: When completing loan applications, ensure accuracy and consistency. Avoid applying to too many lenders within a short period because it can adversely impact your credit rating.

Crucial Reminder: When applying with multiple lenders, be mindful that each lender will conduct a ‘hard credit inquiry’ or credit check, potentially causing a negative impact on your credit score.

Make Informed Decisions

First, understand the significance of Annual Percentage Rate (APR), loan terms, and interest rates. These terms influence your overall borrowing costs, repayment schedule, and the financial commitment you’re entering.

APR represents the total cost of borrowing money, including the interest rate and any fees charged by a lender. APR varies based on credit score and is an essential factor in auto loans. It notes that people with higher credit scores generally receive lower APRs, which can result in more affordable loan payments. 

When reviewing loan agreements, carefully read the fine print to uncover hidden fees, prepayment penalties, or unexpected charges. Seek clarification on ambiguous terms and ensure the agreement accurately reflects your understanding.

Tip: Utilize an auto loan calculator (like this one) to determine the monthly EMI for new/used car loans. Input details such as down payment, interest rate, and loan tenure for accurate results.

Alternatives to Traditional Financing

To secure car financing with bad credit, explore alternatives beyond conventional options to find better-suited arrangements. Consider these options:

  • Exploring Lease-to-Own Options: Lease-to-own arrangements offer an alternative to traditional car ownership. They provide an opportunity to lease a vehicle with the possibility of owning it at the end of the lease term. This can be advantageous for those with credit challenges as it may require less stringent credit requirements.
  • Considering Buy Here, Pay Here Dealerships: These dealerships sell vehicles and offer financing directly to buyers. While interest rates might be higher, these bad credit auto dealers can be more accommodating to individuals with bad credit histories.
  • Peer-to-Peer Lending Possibilities: Peer-to-peer lending platforms connect borrowers directly with individual investors. This option might be more lenient in credit evaluation and offer unique borrowing terms.

Post Bad Credit Car Financing: 2 Vital Reminders


After successfully securing financing for your new car despite having a less-than-ideal credit history, consider the following two key points:


Securing Your Investment

Once you’ve obtained your car financing, ensuring the success of your investment becomes paramount. Here are a few key considerations:

Importance of Regular Loan Payments: Consistently making your loan payments on time is vital as it fulfills your contractual obligations and reflects positively on your credit history. Missing your monthly car payment even once can have detrimental consequences.

Rebuilding Credit Through Timely Payments: Making timely auto loan payments is crucial for gradually improving your credit score. Consistently avoiding late payments demonstrates financial responsibility to lenders, positively impacting your creditworthiness.

Consequences of defaulting on a bad credit auto loan: Recognizing the outcomes of loan default is crucial. It can lead to the car being taken back, significantly harming your credit health and hindering your financial prospects.

Long-Term Financial Planning

Looking beyond just getting a loan, having a smart long-term financial plan is essential for ensuring ongoing financial success.

Using the Car Loan to Rebuild Credit Over Time: Successfully managing your car loan payments over time contributes to rebuilding your credit profile. Improved credit opens opportunities for better loan terms and financial stability.

Graduating to Better Financing Options: As your credit improves, you can consider refinancing your auto loan to secure more favorable terms. This shows your improvement and gives you more financial flexibility in the future.

Maintaining Healthy Credit Practices After Purchase: Maintaining responsible financial practices and avoiding common credit mistakes is crucial even after securing the loan. This includes managing debts wisely and paying bills on time to improve your financial well-being.

Final Tips and Takeaways

In conclusion, securing a car loan with bad credit requires a strategic approach. Understanding credit scores, exploring tailored financing options, and implementing steps to improve approval odds are crucial. Post-financing, regular payments contribute to credit rebuilding and long-term financial success.

You can gradually improve your financial standing by staying informed and fostering positive lender relationships. Set realistic expectations, maintain responsible practices, and prioritize ongoing financial education for lasting success. 

Through these principles, you confidently navigate the challenges of bad credit financing and pave the way for better financial prospects.

FAQ

Q. Is it possible for someone with bad credit to obtain a car loan?

Yes, people with poor credit can secure car loans. However, the available choices and terms might be more restricted than those with better credit scores.

Q. What does a FICO score mean?

A FICO score is a credit score utilized to evaluate an individual’s creditworthiness. It’s based on credit report data and ranges from 300 to 850. A higher score means better credit, which can result in better loan conditions and lower interest rates.

Q. How to finance a car with bad credit?

To finance a car with bad credit, assess your credit situation, explore various financing options (like bad credit auto loans and in-house dealership financing), improve your credit score, gather necessary documentation, and make informed decisions.

Q. Are subprime lenders advisable for bad credit car financing? 

While they might seem convenient, be cautious. Subprime lenders often ask for more interest and less good terms. Look into other options for better results in the long run.

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Prajjwal

Prajjwal

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