So your credit rating took a hit, but you need a car to get back on your feet. Can you still get a car loan with poor credit? Yes, most people still can borrow money for a car. But expect to pay additional interest and possibly accept more restrictive terms, such as a lower maximum loan amount, shorter loan length or higher down payment.
That’s because your costs to borrow the money are based on lenders’ assessment of their risk. It’s not personal, even if it feels that way. While most people with lower credit scores still will keep up with their payments — no one wants to lose their car — the statistical risk of problematic loans is higher for this group.
Here are options for a buyer with poor credit, or simply a buyer with no meaningful credit record, to get the best deal possible on a car loan. We also included some links to find more details on auto loans. Finally, you can check out the Consumer Financial Protection Bureau to find more information on your rights and responsibilities as a borrower.
Know Your Credit Score
Your credit score, a numerical measure of your creditworthiness, is a major factor in determining the interest rate you’ll have to pay for a loan. Over the past year, rates on a used car ranged from the mid-single digits for buyers with the best credit scores to north of 20% for those with poor credit. For the latter group, lenders may also require a higher down payment or other terms.
It’s important to know where you stand; you even might be surprised in a good way. You are entitled under federal rules to one free credit report from each reporting agency every 12 months; the three major national credit agencies used by lenders (Equifax, Experian and TransUnion) make them available from a single site. For more frequent reports, there are free and paid sources online.
Your credit report will show your bill payment history, current debt and other financial information; your credit score is not technically included in the report alone (you may need to dig a little deeper to get that information for free, like through one of your credit cards). It’s important to study the report and move to correct any errors (see more on your rights to dispute errors).
Generally, the score is based on your record of paying bills on time, your open credit accounts and overall debt, how long your loans or credit-card accounts have been open, and how much of your available credit you use (if, for example, you’re maxed out on one or more credit cards). Also on your record are any debt collections, repossessions, foreclosures and bankruptcies, as well as how long ago they happened.
Your score likely will vary slightly among the agencies based on when their data was last updated and the particular scoring models they use. A common model is the FICO score, which ranges from 300 to 850. Lenders generally classify creditworthiness as poor (below 580), fair (580 to 669), good (670 to 739), very good (740 to 799) and exceptional (800 and up).
You can work to improve your score over time with regular payments on loans and credit cards, and by paying down your overall debt. That’s likely to be a longer-term project than your current need for a car, but even if you have to pay more for a loan now, improving your credit score could let you refinance at a better rate down the road.
“Improving your credit is going to take longer than you want, or expect,” said Phil Reed, an automotive columnist at financial-advice site NerdWallet. “You can really turn yourself around in three years. But even six months can make a big difference if you have less serious problems.”
Set a Budget and Stick to It
Decide what you can afford before you set foot on a car lot, and stick to that budget. You’ll want to be sure of what you can pay per month — and don’t forget that your monthly auto budget needs to include (among other things) insurance, which also can cost more if you have spotty credit. The last thing you want to do is dig yourself a bigger credit hole by missing payments. Cars.com’s affordability calculator can help you turn a monthly budget into a prospective out-the-door price on your vehicle.
But don’t just focus on the monthly payment as you plan. Focus also on the amount you are borrowing and the total you’ll have paid by the end of the loan. Then, consider a cheaper vehicle that will let you borrow less and take on a shorter loan. That will save money on the interest rate — as longer loans typically become more expensive — and you’ll own the vehicle sooner (which means no more payments).
“It’s a good idea to start with the loan and then go to the car — particularly with bad credit. You are not gonna get the car of your dreams,” Reed said, but “any car can vastly improve your living situation if public transit is not great.”
Shop Around and Get Preapproved for a Loan
You don’t have to take just any loan offered because you have spotty credit. Once you’ve set a budget, you should shop around for better loan terms, just like any other borrower would.
“You may feel that you don’t have credit, but you may be surprised,” Reed said. “There could be more options than you think.”
Get quotes from multiple lenders to compare. A good place to start is the credit union or bank where you’ve done business. They have a good read on your situation over time, and they might give you credit for things that don’t show up in a credit rating score, such as being a responsible customer. There also are numerous online lenders that will service buyers with less than perfect credit. Your credit score will be a major factor, but some lenders will give more credit than others for additional information. See more information on auto-loan shopping. After shopping around, try to get preapproved so you can go to a dealer with the loan offer in hand rather than relying on the dealer to arrange a loan.
“It’s better to shop around and not just throw yourself on the mercy of the dealer,” Reed said.
For the service of arranging a loan, dealers can frequently mark up the loan to a higher interest rate than you’d otherwise qualify for, adding profit on the sale. But the dealer might also come up with a better deal than your third-party lender. Having a loan offer in hand lets you compare rates, overall costs and monthly payments. It gives you options and can ease the pressure in a dealer’s finance office. Ultimately, it can help you stay within the budget you set in advance.
Credit-rating agencies tend to penalize multiple new applications for credit, and you don’t want to lower your score any more. But they treat several auto-loan applications in a short period of time as just one application. You just can’t stretch it out, so do all your shopping over a couple weeks to be safe. And while you’re shopping for a car loan, you should avoid applying for other credit, such as a new credit card.
Add a Co-Signer for the Loan
Recruiting a relative or friend to co-sign on a car loan can help a buyer with spotty credit, or a young buyer with little credit history, qualify for a loan or get better terms. But you should be very sure you’ll be able to keep up payments. The co-signer is equally on the hook for the full amount of the loan. And if you fall behind paying, his or her credit is damaged as well. That’s not going to do anything good for your relationship.
Beware of ‘Buy Here, Pay Here’ Dealers
If you’re out of other options due to a really bad credit history, there are used-car sellers known as “buy here, pay here” dealers. BHPH dealers specialize in buyers who can’t get other loans. You’ve probably seen ads touting their services: no money down, no buyer refused. These dealers generally offer loan rates much higher than that of banks, credit unions or other lenders. Many make the loans themselves, so they’re just as much in the finance business as the car business. “Buyer beware” is always a good philosophy in car shopping, but it’s essential with BHPH dealers.
“Buy here, pay here is something you should try to avoid — that has to be your last option,” Reed said. “The business model is to exploit people who don’t have a lot of money and are desperate to have a vehicle.”
Some such dealers require buyers to pay monthly, or even biweekly, at the dealership (hence the pay here part). They can be very aggressive about collection and repossession, even for minor issues, and they might install GPS locators and ignition immobilization devices in the car that make repossession easier. BHPH dealers justify their tactics by pointing to the risks they take; they say they provide a service for people who might otherwise be locked out of getting much-needed transportation.
But the buyer-beware list is long with such dealers. You’ll want to carefully read everything before you sign or hand over money to be sure the loan contract doesn’t include hidden fees or add-ons that raise the real price. The CFPB warns that while other lenders generally limit a loan amount based on the actual value of the vehicle, a BHPH dealership making the loan might let you “borrow to pay more than the vehicle is worth.”
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Some BHPH dealers have even been known to make loans they’re sure the buyer can’t pay, only to repossess the car and sell it again at a profit — a scam known as “yo-yo sales.” The buyers’ credit gets hammered, and they’re also out a car. Read a lot more about potential hazards in a report by the Los Angeles Times. BHPH is an option if your credit has you cornered, but you might want to consider help from a nonprofit credit counselor to help expand your choices next time.
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