How to Get an Auto Loan With Bad Credit

If you’re shopping for your next vehicle but don’t have the best credit, it can feel impossible to close a deal. Fortunately, there are auto loans for bad credit out there. However, you will likely pay a higher interest rate, be able to finance less, and may have to put more money down.

Our guide explains how to get an auto loan with bad credit. You’ll also learn practical tips to help you boost your score, unlock more favorable rates, and save money over the life of your loan. 

How to get an auto loan with bad credit: the basics

There are auto loans for bad credit that you may qualify for, even if you don’t have the best score. Many lenders specialize in working with borrowers who have low scores or limited credit history. 

When learning how to get an auto loan with bad credit, it’s important to know the trade-offs, which may include:

• Higher interest rates
• Stricter loan terms
• Larger down payment requirements 

Doing your research and understanding your situation will help you set realistic goals once you start shopping. 

Securing an auto loan, step by step

Here’s how to get auto loans for bad credit: 

Step 1: Know your credit score

Before applying, check your credit score and review your credit reports. Your report and score will give you a clear picture of where you stand and what your options are. Identify any negative remarks on your credit report, and look for errors that could be impacting your score. 

If you know your score before reaching out to lenders, you can review the rate ranges you may qualify for. Let’s say you have a credit score of 580. In that case, you know you won’t qualify for the best market interest rates. However, you can search a lender’s website to find out whether they work with borrowers in that score range. 

Step 2: Set a realistic budget

Lenders consider how much you can afford to pay monthly, but they are more focused on how much you are eligible to borrow overall. With that in mind, set a total budget for your vehicle purchase. Consider the price of the vehicle, as well as add-ons, such as:

• Tax, tag, and title
• Dealer fees
• Optional add-ons, like an extended warranty

If you get approved to borrow $30,000, you should look for vehicles that are at least $2,000 to $3,000 less than that limit, especially if you are putting little to no money down. Otherwise, the total amount financed may exceed your approval amount by the time the dealer adds all of the other fees to the deal. 

Step 3: Save for a larger down payment

If you want to purchase a vehicle that’s outside of the amount you can finance, you’ll need to put enough money down to cover the difference. Making a larger down payment can also reduce how much you pay in interest over the life of the loan. 

Start saving for a larger down payment amount. Even if you are able to save a large amount to put down, don’t use it as an excuse to push your budget too far. Your monthly vehicle payments shouldn’t be a burden. You want them to be manageable. 

Step 4: Consider a cosigner

A cosigner with strong credit can improve your odds of getting approved for an auto loan. You may qualify for a larger loan amount, better interest rates, or both. Lenders see this as added security because someone else is responsible if you miss payments. 

Just remember, it’s a huge financial commitment for both of you, so don’t take on more than you can afford. 

Step 5: Shop lenders that work with bad credit

While most lenders use the same basic guidelines to evaluate borrowers, some lenders are more flexible when it comes to approving people with bad credit. Look for credit unions or online lenders that have more flexibility. 

Be wary of lenders that seem to be new or that you can’t find much information about. Predatory lenders may approve you for a loan with an extremely high interest rate. 

What counts as bad credit for an auto loan?

Typically, a score below 580 is considered “bad.” Some lenders consider anything under 600 to be subprime. Missing payments, taking on too much debt, or letting accounts go into collections can all contribute to a lower score. 

Types of bad credit auto loans

Here are some common options when looking for bad credit auto loans: 

Subprime auto loans

A subprime loan refers to any loan offered to borrowers with lower credit scores. These loans are widely available for auto financing, but they come with higher interest rates. The lender may also approve you for a lower loan amount and limit your loan term to fewer months, which means a higher monthly payment. 

For example, you may only be able to finance a vehicle for 60 months. While that means you’ll pay less in interest over the life of the loan, your monthly amount will be higher compared to a 72-month term for the same financed amount. 

Buy here, pay here financing

Buy here, pay here financing is a common option for individuals who have bad credit. Auto dealerships offer financing in-house, which means you don’t have to worry about your credit score or other factors. 

The downside is that the rates tend to be very high. Some buy here, pay here dealers require you to make weekly or bi-weekly payments, which can be more stressful to manage.

Additionally, buy here, pay here dealers tend to have a limited selection of vehicles. Still, if you are in a pinch and need a vehicle quickly, this may be the best option available to you. 

Credit union auto loans

Credit unions sometimes offer more competitive auto rates than large lenders. You may also encounter more flexible terms, especially if you are already a member. If you have a credit score that isn’t the best, check with your local credit union about financing options. 

How bad credit affects your auto loan rate

If you are car shopping with poor credit, you may still be able to get approved for an auto loan. However, there are consequences for having a lower score, such as:

Higher interest rates

Auto loan interest rates are based on the economy, current inflation, and your individual credit profile. If you have poor credit, you’ll pay more to finance a vehicle. That’s because lenders view you as being higher risk. 

Larger down payment requirements

In general, a lender will tell you how much you are approved to borrow, what the terms are, and what your rate is. If you purchase a vehicle under that limit, you shouldn’t have to put any money down.

The challenge arises when you want to purchase a vehicle outside of your borrowing limit. In that case, you’ll need to come up with a down payment to cover the difference. 

Shorter loan terms

The longer your term, the more interest you’ll pay over the life of the loan. However, a longer loan term can make your payments lower and more manageable. Unfortunately, borrowers with bad credit may not be eligible for long loan terms, such as 72-month or 84-month terms. 

How to improve your credit before applying for an auto loan

If you don’t need a vehicle right now, there’s time to boost your score before applying for auto financing. Here are a few ways to boost your score and make yourself a more appealing applicant: 

Pay down existing debt

Make payments on your existing debt to improve your payment history and boost your score. Paying off debt can also lower your debt-to-income ratio, which has a positive impact on your score. 

The credit bureaus also track your credit utilization rate. If you are using a high percentage of your credit cards, it negatively impacts your score. Reducing your utilization rate can improve your score over time. 

Make all payments on time

Late payments have one of the harshest impacts on your credit score. Even a single late payment can reduce your score if it gets reported to the credit bureaus. With that in mind, make sure you are making all of your payments on time. 

Dispute inaccuracies 

Errors on your credit report can drag down your score. You are eligible to receive one free credit report per year from each of the three major credit bureaus. Request your free report and review it for errors. You can request all three versions at once or space out your requests so you can keep a close eye on your credit history throughout the year.

If you notice an error, Kikoff can help you dispute it. Our free dispute letter generator is available to all consumers. You can generate and mail a dispute letter to Experian or Equifax. TransUnion allows you to file your dispute electronically. 

Limit new credit applications 

When you apply for new credit, it temporarily lowers your score. Opening new credit accounts can also negatively impact your score if you apply for several close together. You should avoid having your credit run or opening new credit accounts in the months leading up to an auto purchase. 

First steps toward building credit

If you want to build a stronger credit history, you should: 

Start with small, manageable accounts

Don’t rush to borrow money or open high-limit accounts. If you already have a couple of credit cards or lines of credit, focus on managing them effectively. This means making payments on time and keeping your utilization rate down. 

Use tools that report payment activity

Typically, landlords and utility providers don’t report on-time payment activity to the credit bureaus. However, you can report verified on-time payments using a tool like Kikoff. Reporting positive financial behavior that you are already engaging in can strengthen your credit profile over time and lead to a higher score. 

Stay consistent over time

There aren’t any shortcuts to a high credit score. The key is being consistent over time. Make payments on time, avoid opening several new accounts in a short timeframe, and don’t stretch yourself too thin. These little positive habits add up and can do wonders for your credit score. 

Additional tips for getting approved

No one wants to head to a car lot, find the right vehicle for them, and get denied when it’s time to discuss financing. Here are some tips to help you get approved and avoid the hassle of a denial: 

Choose a more affordable vehicle

When you need a reliable vehicle to get you to work and handle basic errands, focus on affordability. Now may not be the right time to look for your dream vehicle. Instead, look at vehicles in your price range that offer a low cost of ownership and reasonable gas mileage. 

Show proof of stable income

Lenders want to see that you are consistently earning enough to make payments on time. While you don’t need to make a huge sum of money, you should be bringing in enough to cover your bills and have a little left over each check.

If you often feel cash-strapped, consider using online budgeting tools to get your expenses under control. A sound budgeting strategy will help you identify ways to cut back and manage your spending.  

Avoid unnecessary add-ons

Extras like extended warranties or higher trim packages can increase your loan amount and monthly payment. Look for simpler vehicles that are more affordable. While extended warranties may be appealing, they could also be out of your current budget. 

If you are serious about getting a vehicle with some built-in warranty coverage, consider a certified pre-owned vehicle that includes a basic warranty without added cost. 

Common mistakes to avoid

While you may be eager to start shopping for a vehicle, make sure you avoid these mistakes:

Skipping pre-approval

You don’t want to show up to a dealer and rely solely on their financing options. Sometimes, dealers have great financing deals available. Other times, you’ll find that seeking financing on your own is the better fit, especially if your credit isn’t that great. 

Get pre-approved before you start vehicle shopping. When you meet with a salesperson, let them know how much you are pre-approved for so that you don’t waste time looking at vehicles outside of your budget. 

Focusing only on monthly payments

When considering whether you can “afford” a vehicle or not, it’s tempting to look solely at the monthly payments. While that figure is important for budgeting purposes, you should also pay attention to the total loan amount and how much you will pay in interest over the life of the loan. 

Not reading the loan terms

Carefully review the terms of the loan, including the interest rate and whether there are any early payoff penalties. Make sure the loan terms are clear before you sign. 

When you should wait before applying 

Sometimes, waiting is the best option. Here are a few scenarios where you should hold off on car shopping:

• Your credit score is less than 500
• You don’t have money to put down
• You’ve recently missed payments 

If any of these circumstances apply and you don’t need a car right now, it’s best to wait until you improve your score. 

Conclusion

If you are ready to start vehicle shopping, but your credit score could use some work, Kikoff can help. Kikoff is a credit-building platform that helps you improve your credit by creating a positive history. Our platform includes verified rent and utility payment reporting, free error dispute tools, and more. 

Build credit responsibly with Kikoff.