How to Get a Car Loan with Bad Credit
| Need a car loan but have bad credit? Here’s what to do to make financing a car easier for you…
What auto lenders want from you
As with any loan, you need to show that you’re a reliable borrower. This boils down to one main thing:
You make payments on time, every time.
Any lender – auto, mortgage, personal, etc. – wants to see proof that you will pay them back once they’ve lent you money. Having a stable income is one way of doing this – if you’re making a consistent sum of money on a regular basis, there’re a good chance you’ll be able to pay back an auto loan.
But that’s not all there is to it.
You also need to show that you can handle that money. If your debt-to-income ratio or credit utilization is high (say 30%+), that doesn’t look great on a loan application.
And if you have a bad history of repaying your debts or managing your personal finances, that won’t look great for your credit score either.
If any of that sounds like you, you may be at a loss. Luckily, there are ways to get a car loan – even with poor credit.
Can I get a car loan with bad credit?
Yes.
Even if you have poor credit, it’s entirely possible to get an auto loan – though it may be more complicated. There are lenders and auto marketplaces designed for the purpose of helping borrowers with bad credit successfully get a loan.
Minimum credit score to get a car loan
While some lenders do have a minimum requirement for a borrower’s credit score, others accept those with poor or even no credit.
For example, if you’ve never gotten a loan or credit card, there’s a good chance you have no credit history. No credit history = no credit score
Rather than denying you for not having credit, the auto lenders on this list understand and accept that not everyone looking for a vehicle has established credit.
However, the lower your credit score is, the higher the interest rates. Even auto lenders with the laxest of rules have to protect themselves from borrowers who may default on (not pay back) their loans.
If you have poor or no credit, be prepared to face higher interest rates or to be required to put forward a greater down payment.
Not sure what your credit score means or what’s considered “good” or “bad” credit? Check out this post.
Financing a car with bad credit
Regardless of your credit score, you’ll need to have a solid source of income. While the requirements for this aren’t typically high, if you don’t have a stable job, more than likely you’ll be denied your loan.
Of course, there’s always the option of paying in cash. If you happen to have enough money to pay for the entire vehicle in cash, your credit score doesn’t matter at all. By paying in cash, there is no lender to deal with and, thus, no risk.
Down payment
The more you put forward as your down payment, the better. Just like with a mortgage loan, if you can put 20% down on your auto loan, you’ll receive:
· Better loan terms
· Lower monthly interest rates or a shorter payoff term
· Higher chance of approval
Simply put, the more money you can hand over in the first place, the lower risk you’ll be to a lender. And when it comes to money, most people (and financial institutions) prefer less risk.
If you don’t have a lot of cash right now, that’s fine too. There are options for lenders who’ll still work with you to get an auto loan.
But if you can, try to save up for a higher down payment before you apply for a loan.
Trade-in
As long as you have the vehicle title, you can trade it in for another option. That said, never trade up if you’re struggling to get your credit score in check.
Trading up typically means higher monthly payments than what you were paying before, which can be tough if you’re on a budget.
Remember, there’s a strong correlation between individuals with poor credit and a tough history of repayment and money management. If that’s you, then it’s better for your own peace of mind to keep your bills as low as possible.
Long story short: Trade in for a lower rate. Don’t trade up.
Getting a cosigner
Having a cosigner on board can increase your chances of getting approved for a car loan. Unfortunately, not all lenders accept cosigners, so you’ll have to check in advance.
The bottom line is, borrowers with poor or no credit have a higher acceptance rate of getting a car loan when they have a cosigner. This is because the cosigner offsets the risk to the lender.
However, cosigners take on the risk of the loan, so if one person is unable to make payments, the cosigner will have to make them instead.
In general, consider the following when either getting a cosigner or becoming one yourself:
· A cosigner should ideally have a established credit (620+ credit score) and a reliable income.
· If you become a cosigner for someone else, make sure the other party is going to make on-time payments of you’ll have to pick up the slack.
· Missed or late payments hurt both parties’ credit score, not just the main borrower.
· A cosigner’s credit will take a temporary hit when getting the auto loan. This comes from the hard inquiry into their credit. Usually, their credit score will return to its original level within one year.
Basically, the cosigner holds equal responsibility to the person who originally wanted the auto loan. This is the same situation that occurs in any loan or when signing an apartment lease.
Best auto lenders for bad credit
While some lenders will decline consumers for having poor or no credit, this list focuses on auto lenders and online marketplaces with higher-than-average approval odds.
With any of these options, make sure you read the fine print before applying or signing up. These lenders and marketplaces offer bad credit auto loans, but interest rates (APR), income requirements, etc. vary.
Prestige Financial
Some key considerations:
· They offer a “Rate Reduction Rewards” program that gradually reduces the interest of your auto loan over time. By making on-time payments, you can reduce your interest by up to 2% each year or .5% every 3 months. Check into the APR they’ll offer you before applying.
· This lender is nationwide.
· Cosigners are accepted.
· You must make around $2,250 a month on an individual application, and you must have solid proof of income.
· They require 6 personal references.
· If you’ve had a Chapter 7 or Chapter 13 bankruptcy, you can still qualify for an auto loan. For a Chapter 7, you must present related documents indicating the process has been finalized. For a Chapter 13, you must have an approved repayment plan.
Credit Acceptance Corp.
Some key considerations:
· An indirect lender, Credit Acceptance Corp offers financing via participating dealerships in all 50 states.
· They will still work with you if you have an open bankruptcy.
· Interest rates can be extremely high (up to 20%).
Auto Credit Express
Some key considerations:
· They aim to help borrowers with no or poor credit get an auto loan at the best rates.
· Car loans range from $5k - $45k.
· They work with you and your budget to figure out the best monthly payments.
· You must earn at least $1500 a month, but there is no required credit score.
Autopay Auto Loans
Some key considerations:
· A reputable online marketplace, they work with private parties, dealers, and related lenders to provide you with the best deal for your auto loan.
· Cosigners are accepted on your auto loan.
· You can prequalify so there is no impact on your credit score, which is great if you’re trying to rebuild your credit.
· They provide vehicle service contracts with rates as low as 1.99%.
car.Loan.com
Some key considerations:
· Another online marketplace for financing your vehicle, they match you with lenders and dealers near your location.
· There are no financial requirements, and the application is online.
· Overall, the process is generally considered to be simple and they work to provide borrowers who need it with a second chance.
New Roads
Some key considerations:
· No down payment is required, but interest rates will be higher based on the amount you borrow.
· They accept borrowers with an existing bankruptcy or other derogatory mark on their credit score.
· Instant approval on new and used car loans.
· New Roads exists in 30 states, so be sure to double-check their locations before applying.
Cars Direct
Some key considerations:
· Their application is fast, free and entirely online.
· They work with borrowers with no credit and poor credit, as well as with those with a past bankruptcy. In fact, they specialize in borrowers with poor credit.
· You must make at least $500 a week to qualify.
LendingTree
Some key considerations:
· LendingTree boasts a major network of partners and works with people of all credit types.
· They recommend a credit score of at least 585, but some of their participating lenders will approve a lower credit score. Keep in mind that the lower the credit score is, the higher the interest will be.
· They do not do a hard inquiry, so there is no effect on your credit score.
· When you apply, you’ll be given up to 5 vehicles to compare simultaneously.
Carvana
Some key considerations:
· You do not need to have a credit score to work with Carvana, but your annual income must exceed $10,000.
· It is possible to finance a car loan and purchase a vehicle through them. Plus, they have a relatively extensive list of used vehicles that are certified through their process.
· You can prequalify with no impact to your credit, but if you do, you can only choose from their existing stock.
· The down payment is nonnegotiable, but it varies based on the vehicle and loan amount.
· You cannot have a cosigner, nor can you have an active bankruptcy, to qualify.
myAutoloan.com
Some key considerations:
· An aggregate site of car loans, they work with multiple lenders to get you the best rates.
· You can compare up to 4 lenders at once.
· If you’ve filed for bankruptcy and had it discharged, you can still qualify.
· You must make at least $2,000 per month ($24,000 per year) with steady employment and residency in the past year.
· Interest rates start at 1.99% and go up to 4.69%, depending on the type of vehicle, loan, and length of loan.
Capital One Auto Finance
Some key considerations:
· The minimum required credit score is 500 to qualify.
· Vehicles they help you finance must be 10 years old or less, with no more than 12,000 miles.
· It is possible to prequalify, so there is no impact on your credit score.
· If you have an existing car loan, you may be able to refinance for better rates through them.
· Loans start at $4,000.
· You must make between $1,500 and $1,800 to qualify, depending on the amount of the loan.
· If you have an existing Capital One account, it must be in good standing before you apply.
Carmax
Some key considerations:
· Carmax works with various financial institutions to boost your chances of approval for an auto loan.
· Applying with them may result in a hard inquiry, but it depends.
· You do need to show proof of income (as is the case with most of these lenders), but they are lenient with bad credit.
Besides these options, you can also check with your bank or credit union to see if they offer financing for an auto loan. Depending on your circumstances, you may be able to get better rates from them than with other lenders or online marketplaces.
Non-profit lenders can also offer auto loans at good rates – better rates than many dealerships.
How long does it take to get approved?
Getting approved can take minutes or hours, depending on the circumstances and the lender. Before applying for an auto loan, read the fine print and see what they offer. You can also get in touch with them directly (usually via phone).
Terms to know when getting a car loan
Loan term: The length of the loan. A typical loan is between 48 months (4 years) and 60 months (5 years). You may find longer loan terms for lower monthly costs, but these tend to rack up more interest over time.
Interest rates or APR: Higher credit score = lower APR. Lower credit score = higher APR. The lower APR, the better and less you’ll end up owing.
Rate shopping: When you’re searching for the best rate for a loan (this can be auto, mortgage, personal, etc.). Lenders and online marketplaces will also do rate shopping, but this can result in hard inquiries which temporarily hurt your credit score.
Soft and hard credit pull: A soft credit pull does not impact your credit score, while a hard credit pull does. Ask the lender before you agree to one.
Prequalification: This results in a soft credit pull. It is done to narrow down your options without impacting your credit score. It also helps to reduce the amount of hard credit pulls.
Documents you’ll need for an auto loan
Different lenders require different documentation, but here’s what you’ll typically need on hand before you apply for a car loan:
· An active, non-suspended driver’s license with an updated address
· Proof of car insurance – you can get this while trying to finance a loan, but having it beforehand speeds up the process considerably
· Proof of residency – a utility bill, a rental lease… anything with your name and matching address
· Proof of employment – this can be pay stubs, tax returns (at least the past 2 years’ if self-employed), W2’s, etc.
· Personal references – friends, colleagues, family members… Some lenders require up to 6, depending on your credit score
· Contact info – usually a working phone number
· Discharge papers if you’ve had a bankruptcy, and any other related court documents
Tips on getting a car loan with bad credit
With the goal of making financing a vehicle easier for you, here are some final tips to get you on the right track:
· No matter what your credit score is now, keep building it up with on-time payments and good money management habits. Even if it takes time, starting now will make any financing you do in the future much simpler.
· Try to put more money forward as a down payment to improve your loan terms and interest rates.
· Consider getting a cosigner to help you out, but make sure they’re someone you trust and who’s willing to pick up the slack if needed. On that note, try to hold off on getting a loan if you’re not sure it fits into your budget.
· Look for lenders who have a prequalifying option.
· Keep an eye out for special rates or discounts – seasonal, year-end, etc. If a deal sounds too good to be true, cross-reference it just in case.
· Dispute errors on your credit report and keep hard inquiries down to a minimum.
· Consider financing a vehicle through your bank instead of another lender or dealership because they are less likely to try to upsell you.
· Compare between different lenders, dealerships, and online marketplaces.
· Always read the fine print. If you aren’t sure about something, get someone you trust to look it over with you before you sign anything.
· Calculate affordability. It’s not just the base cost of the vehicle you’re looking at. Think of any upgrades (speaker systems, backup cams, etc.) and factor those into the price.
· Also, calculate the interest rates.
· Consider the total monthly payments – loan, insurance, gas, maintenance, seasonal issues (ie. winter tires)…
· Think about refinancing your car loan once your credit score has improved to get lower interest rates. You can also shop around for car insurance at this point to get better rates.
Final thoughts
Having bad credit or no credit won’t stop you from getting an auto loan, but higher credit equals more options. Fortunately, as your credit gradually improves, you’ll qualify for more options.
When you’re ready to get an auto loan, the best advice would be to be patient and stay informed about any potential lenders. Never rush into something you’re not sure about. After all, your comfort level and ability to pay off any type of loan comes first.
And if you don’t have a lot of time to debate, then a lender on this list should help you get behind the wheel and on the road in no time.