5 Min Read | September 15, 2022
It’s possible to buy a car when you have bad credit, but it can be harder to qualify for a loan. These tips may help low-credit buyers improve their financing options.
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At-A-Glance
It’s not impossible to get a car loan with bad credit, but low credit scores tend to equal high interest rates.
The higher you can boost your credit score, the better your chances of qualifying for a loan at a lower interest rate.
Used cars tend to have a lower price tag, which can make them easier to buy outright or obtain financing for.
Search online for “car loans with bad credit” and the abundance of results may provide a boost of encouragement: Indeed, you can buy a car with a credit score that resembles the starting point on the AM radio dial.
And, yes, if you are in that 500–600 credit score range, obtaining the financing to buy a car is doable. Even a small percentage of individuals with deep subprime credit scores – 500 or below – obtained auto financing in 2021.1But it’ll take some nuancing and strategic planning to improve your chances. Let’s take a look under the hood at the process.
What Credit Score Is Needed to Buy a Car?
No specific credit score will automatically qualify you for a new car loan, but the higher your score, the better the chances of approval. But even if your credit score is in what Experian calls “subprime” (501–600) or “deep subprime” (300–500), getting the financing needed for a car is still doable. According to the credit bureau’sState of the Automotive Finance Market Q4 2021report, 16% of all new and used car financing went to borrowers with a credit score of 600 or below.2
Buying a Car with Bad Credit Is Possible
If you need a car, don’t talk yourself out of trying to buy one just because your credit isn’t as ideal as lenders prefer. Here are some tips to help navigate the process:
Know your credit score.The first thing to consider isn’t which car you want to buy, it’s where your credit score stands. This can help you get a sense of how likely you are to qualify for a loan and what your interest rate might be. Use one or several of thefree credit scorewebsites available to determine your FICO score or VantageScore, the top two credit scoring models. It’s also a good idea to check yourcredit reportto make sure there are no mistakes.
Save money for a larger down payment.Lenders want to make a profit on the money they lend. One way that happens is to assure themselves that a loan will be repaid, with interest. But low credit scores tend to signal a greater likelihood of default. If buying a car isn’t an immediate need, it’s a smart idea to save additional money to make a larger down payment. A larger down payment reduces the amount of money you’ll have to borrow, which lessens a lender’s risk. In turn, this could help boost your chances of qualifying for an auto loan, even with bad credit.
Build up your credit score while you save and shop.Buying a car is a major investment; the average price of a new car topped $47,000 by the end of 2021.3Since interest rates are largely determined by your credit score, take time to work on building up your score while you save money and shop around. Boosting your score by a few points now could save you a few bucks later, especially if your credit score is on the cusp of the next highest category.
Among the ways toimprove your credit score:
- Focus on making on-time payments.
- Pay down debts to lower your credit utilization ratio.
- ConsiderDIY credit reportingoptions. For example, new programs such as UltraFICO, Experian Boost, and Experian Go enable people to enhance their credit scores with alternative financial data, like bill-payment information and buy now, pay later arrangements.
Average Car Loan Rate by Credit Score, Q4 20214
| Credit Score Category | New Car Loan Rate | Used Car Loan Rate |
| Deep subprime (300–500) | 12.53% | 19.87% |
| Subprime (501–600) | 9.41% | 15.96% |
| Near prime (601–660) | 6.07% | 9.80% |
| Prime (661–780) | 3.51% | 5.38% |
| Super prime (781–850) | 2.47% | 3.61% |
Ask someone to be a cosigner.Acosigner, often a family member such as a parent or spouse, agrees to accept and assume legal responsibility for paying off the auto loan if you no longer can. This helps reassure lenders that the debt will be repaid. The cosigner should usually be someone with good to excellent credit, but remember: Missing payments could hurt their credit score.
Consider a used car.Used cars cost less money, and applying for less financing brings less risk to the lender. Lower costs also make it more attainable to purchase the car outright – meaning, you can bypass a lender altogether. If you’re having trouble qualifying for a new or used auto loan from a bank or credit union, paying for a used car in cash may be your best option.
Be Aware that ‘Buy Here, Pay Here’ Arrangements Can Be Costly
If you’re looking to buy a car despite having bad credit, there’s a good chance you’ll come across dealerships that offer “buy here, pay here” auto loans. The dealership finances these loans on its own, often earmarked for borrowers with bad credit or no credit. While these loans may seem tempting, the Consumer Financial Protection Bureau (CFPB) warns that these loans tend to have interest rates much higher than what a bank or credit union would offer, even to those with credit score concerns.5The CFPB also cautions that in-house lenders at no-credit-check or “buy here, pay here” dealerships may not set a limit on the loan amount, even if it’s more than the value of the car. That could lead you to borrowing more money – and paying more interest – than necessary.
The Takeaway
Navigating the car-buying process with a low credit score can be tricky, but it’s doable. If getting a car is an urgent need, it may require some sacrifices, such as forgoing a desired make and model or certain features and add-ons. But if you can take the time to save for a larger down payment and boost your credit score, you may succeed in increasing your chances of obtaining car financing.
1 “State of the Automotive Finance Market Q4 2021,” Experian
2 Ibid.
3 “Average new car price tops $47,000,” Kelley Blue Book
4 “State of the Automotive Finance Market Q4 2021,” Experian
5 “What is a ‘no credit check’ or ‘buy here, pay here’ auto loan?,” Consumer Financial Protection Bureau
Michael Graceis a personal finance and technology freelance writer based in New York.
All Credit Intelcontent is written by freelance authors and commissioned and paid for by American Express.
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