Getting a car loan with bad credit can require more preparation than getting approved with a strong credit history. Lenders in the United States consider several factors when evaluating auto loan applications, including credit history, income, existing debt, vehicle value, loan amount, and down payment.
The good news is that there is no universal minimum credit score for every auto loan. Some lenders work with borrowers who have poor credit or limited credit histories.
Start by Checking Your Credit
Before applying for financing, find out where you stand.
Review your credit reports from the major credit reporting companies and check for inaccurate information. Errors can potentially affect your ability to obtain credit or influence the terms offered.
You should also understand that lenders may use different credit-scoring models. An auto lender may consider a traditional credit score as well as other information from your credit history.
Knowing your credit profile allows you to approach financing with realistic expectations.
Determine How Much You Can Afford
The next step is creating a vehicle budget.
Instead of starting with the maximum amount a lender says you can borrow, calculate what monthly payment fits your own budget.
Remember that the cost of owning a vehicle includes much more than the loan payment. You may also have:
- Auto insurance
- Fuel
- Maintenance
- Repairs
- Registration
- Taxes
- Parking
- Vehicle-related fees
A car that appears affordable based only on the monthly loan payment may become expensive once all ownership costs are included.
Save for a Down Payment
A down payment can make a significant difference.
If a vehicle costs $20,000 and you provide $4,000 upfront, the amount financed may be substantially lower than if you finance nearly the entire purchase price.
The CFPB states that a down payment reduces the amount borrowed and may reduce the interest rate or overall cost of the loan.
For borrowers with bad credit, reducing the amount financed can also make an application more manageable.
Look for Preapproval
Getting preapproved can help you understand your financing options before negotiating with a dealership.
You can potentially compare offers from different lenders and understand the approximate loan amount, APR, and payment available to you.
Experian recommends applying with multiple lenders and comparing offers before choosing an auto loan.
When shopping for auto financing, try to complete applications within a relatively short period. Credit-scoring models may treat multiple auto-loan inquiries made within a shopping period as a single inquiry for scoring purposes, although exact treatment can vary.
Consider a Co-Signer
A co-signer with stronger credit may improve your financing options.
A co-signer adds their credit history and agrees to repay the debt if the primary borrower fails to do so. This can give a lender additional confidence in repayment.
However, co-signing is not simply a favor without financial consequences. If payments are missed, the co-signer can also be affected.
The CFPB warns that both borrowers and co-signers should understand their responsibilities before signing the agreement.
Choose the Vehicle Carefully
When financing with bad credit, vehicle selection matters.
A less expensive used vehicle may require a smaller loan than a new, expensive model. Borrowing less can reduce the total interest cost.
However, the cheapest vehicle is not automatically the best choice. Maintenance history, reliability, insurance costs, mileage, and condition should also be considered.
A pre-purchase inspection can be particularly useful when buying a used vehicle.
Compare the Total Cost
A common mistake is focusing only on the monthly payment.
Suppose one lender offers a lower monthly payment because the loan is spread over a longer term. Another lender offers a higher monthly payment but a shorter term.
The first loan may result in substantially more interest over time.
Always compare:
Amount financed + interest + fees = overall borrowing cost.
The CFPB recommends considering both monthly and overall loan costs when shopping for an auto loan.
Watch for Additional Products
Dealership financing may include optional products such as extended warranties, service contracts, GAP products, and other add-ons.
Some products may be useful depending on your circumstances, but they increase the amount financed if included in the loan.
Ask for every optional product to be explained separately before agreeing to it.
What If You Are Denied?
A loan denial does not necessarily mean you will never qualify for financing.
The lender may provide information explaining the reasons for the decision. Experian notes that lenders can deny applications for reasons including credit history and debt levels.
You can use that information to improve your next application.
Possible steps include reducing debt, correcting credit-report errors, increasing your down payment, choosing a less expensive vehicle, or waiting while you improve your credit profile.
Final Thoughts
Getting a car loan with bad credit requires careful planning.
Check your credit, establish a realistic budget, save for a down payment, compare lenders, and understand the complete cost of each offer.
Bad credit may limit your choices, but informed preparation can help you evaluate the financing options available to you without committing to a loan that does not fit your financial situation.