Having reliable transportation is important — but buying a car with bad credit can be complicated. Lenders use your credit score as a way to determine your creditworthiness, so your credit score impacts what type of loans and terms are available to you. With a poor credit score you may see higher interest rates and other less favorable loan terms.
However, buying a car when you have a low credit score isn’t impossible, and there are a few things you can do to help improve your chances of getting approved for a car loan. Here are some tips to help get you behind the wheel and on the road.
Tips for Buying a Car With Bad Credit
Check your credit report. Before you go car shopping, you should check your credit report. (You can get a free copy every 12 months at annualcreditreport.com.) Not only will this show you where there are opportunities to improve your credit score, but it can also help you find any errors that may be negatively affecting your score. Disputing these errors and getting them removed can help improve your score, which can help you qualify for an auto loan.
Consider the monthly payments. You should evaluate your personal finances and consider how much you can comfortably afford to pay for a car each month. Look beyond what the car payment is and consider factors such as car insurance, gas and maintenance.
Look for a preapproved loan. Before you visit a dealership, see if you can get preapproved for a car loan. Many lenders offer preapproval options online that can help you determine the loan amount and interest rates you qualify for. This can help guide you through the car buying process.
Save up for a down payment. When you buy a car, you’ll usually need a down payment. The more you can put down up front, the less money you’ll need to borrow. A lower loan amount also means less risk for the lender, meaning it may be easier to get approved with a less-than-perfect credit history.
Consider a co-signer. You can also choose to apply for a car loan with a co-signer who has a good credit score. This can help you get approved and qualify for lower interest rates. Just keep in mind that the co-signer’s credit will be at risk since they’re also taking responsibility for the loan. This means if you make late payments or default on the loan, you could be hurting their credit as well as your own.
Shop around. When you’re looking for the right car loan, it may be beneficial to compare offers from different lenders. Your bank or credit union may offer you better terms if you demonstrated a good payment history with them on other loans. You can also check out online lenders and financing options designed for borrowers with bad credit.
Get a used car. You don’t have to buy a new car, just a car that’s new to you. Used vehicles are often cheaper and they typically come with lower insurance rates. Whether you buy from a car dealership or an individual, you should request a copy of the vehicle’s history.
Buy here, pay here. There are dealerships that work with borrowers with bad or no credit. They act as the lender instead of using a third party to finance the car purchase. You should consider all your options before deciding if this is right for you. These deals often come with high interest rates and less favorable terms, like a fee for paying your loan early.
Refinance later. When you take out a car loan with bad credit, you likely aren’t going to get the best loan rates. If you’re working on building your credit, you may be able to refinance your loan later when you’ve rebuilt your score. Keep in mind that while refinancing a loan can help you lower your monthly payments and your interest rate, it can also extend the length of your loan which can increase the total amount you pay.
Consider other options. Taking out a car loan isn’t your only option. You can save up and pay for a car in cash or you can look into leasing a car. If you’re replacing a vehicle, you can also check the trade in value to see if it could help reduce the cost of your new car.
Can I Get a Car With Bad Credit and No Co-Signer?
Yes, it’s often possible to get a car loan without a co-signer when you have bad credit — but it may be more difficult. Many lenders perform a credit check to determine loan approval. With bad credit and no co-signer, you may have more limited loan options and you’ll likely see higher interest rates.
Not everyone has the option of using a co-signer. If you’re applying for an auto loan on your own, try saving up for a bigger down payment, consider a cheaper car or look into some other options.
Can I Get a Car With Bad Credit and No Money Down?
In some situations you may be able to get a car without a down payment. Some lenders offer “no money down” financing options for borrowers with bad credit. Keep in mind that these types of loans may come with higher interest rates and longer repayment terms which increases the overall cost of borrowing.
A down payment can help you get approved for auto financing with better terms. Saving money can be difficult and can take time but if you can wait to purchase a car, you may want to consider waiting until you have a down payment.
Where To Get a Bad Credit Car Loan
Banks and credit unions. If you have an established relationship with a bank or credit union and your accounts are in good standing, they may be more willing to work with you. Traditional lenders often have stricter standards and higher minimum credit score requirements, but it may be worth looking into.
Online lenders. There are a number of places online where you can find auto lenders who work with borrowers with bad credit. These may be called “subprime” or “second chance” loans, they’ll often have higher interest rates but they also have higher approval rates. Online loan marketplaces can help you compare offers while online car dealerships may offer financing options for borrowers with bad credit.
Car dealerships. Some dealerships have in-house financing departments that work with car buyers with bad credit. While these dealerships may have more flexibility when it comes to offering loans to borrowers with bad credit scores, keep in mind that this type of financing may have higher interest rates.
How Does a Car Loan Impact My Credit Score?
There are a number of ways a car loan can impact your credit score — both negatively and positively.
Application. Some lenders will run a hard credit inquiry when you apply for a loan. This can ding your score by a few points, but this is normal and it should recover fairly quickly, although these inquiries can remain on your credit report for one to two years.
Payment history. Payment history is the biggest factor that determines your FICO Score. If you make on-time payments (and your lender reports to the credit bureaus) you can give your score a big boost by establishing a positive credit history. However, if you make late loan payments, your credit can take a negative hit.
Credit Utilization. A car loan is a type of installment loan. Having a car loan can help diversify your credit mix which accounts for 10% of your FICO score. However, it also adds to the total amount of debt you carry. If you have a high debt-to-income ratio this could negatively impact your score.