Getting an auto loan with bad credit can be a difficult venture that often comes with many application denials. Even if you’re approved, you’ll typically get high interest rates. The sections below will walk you through the process of getting a car loan with bad credit and the resources you’ll need when applying for any loan.
How To Get a Car Loan With Bad Credit
When searching for a bad-credit car loan, here are some best practices to follow before applying:
1. Check Your Credit
The first step to getting any auto loan is to check your credit score — especially if you think you have bad credit. Knowing can help you set expectations of what rates you may receive and gauge whether a lender is giving you a good deal.
It’s also good to get a free credit report so you can check for any inaccuracies that may be lowering your score. You can request a free report from Experian and Equifax to review your information before moving forward. In the graphic below, you’ll see a breakdown of the factors that affect your credit score, and how much they affect your score.
2. Determine What You Can Afford
By keeping track of what’s left after payments for rent or mortgages, food, utilities, services and any other loans you have, you’ll have a much stronger idea of how much you can afford for a car loan. You’ll also know which terms you’d need in an auto loan contract and which cars you could afford.
You can use an auto loan calculator to estimate monthly car payments and experiment with different rates, term lengths and down payments to find what works best for you.
3. Gather Required Information
To apply for a car loan, you’ll need to have certain information handy, including your:
- Name, address and phone number
- Social Security number
- Credit score
- Gross annual income information
- Vehicle information (such as the model, age and mileage of the vehicle you want to buy or refinance)
Some financial institutions may also ask for additional information before a loan is approved, like your pay stubs, driver’s license or personal references.
4. Apply for Pre-Approval
Applying for pre-approval can give you the best chance to get approved for an auto loan with bad credit. A pre-approval will give you a conditional loan offer with estimated rates and terms that you’ll most likely receive. Having an offer in hand is something you can use to negotiate with other lenders for better deals. It can also help you feel more confident about what to expect when shopping around.
Keep in mind that auto loan pre-approval results in a hard credit check which can lower your credit score temporarily. We also recommend not applying for multiple pre-approvals at the same time — so you can avoid being treated as an inquiry.
5. Compare Lenders
Compare providers when searching for the best bad credit auto loan for your situation. Try looking for lenders that specialize in bad credit financing along with those with low credit score and income requirements. Also, shop around with multiple types of lenders to give yourself the best chance of getting favorable rates and terms.
How To Get Approved for a Bad-Credit Car Loan
When you apply for a standard used or new car loan or refinance loan, you may not be approved the first time if you have a bad credit history. Here are some tips that can help you increase your chances of getting approved by an auto loan lender:
Apply With a Co-Signer
You can ask someone with a strong credit report who you trust to co-sign a bad credit auto loan. By co-signing, the person agrees to pay back the loan if you default. This allows you to take advantage of lower interest rates that you would otherwise not get.
Buy a Car With Cash
If you can afford to buy a vehicle with cash, it might be your best option — even if it’s not the car of your dreams. Owning a car outright means you don’t risk repossession. Since you don’t owe any money on the vehicle, it can be considered a financial asset rather than a liability. This can help bring your credit score up for future car shopping.
Make a Large Down Payment
If you make a large down payment when purchasing your used or new car, it will decrease the loan amount. This makes it more likely that a lender will approve your loan since it’s reducing the overall risk.
Buy From a Private Seller
If you’re looking to buy a used car, you’ll typically pay less by buying from a private seller rather than a dealership. These purchases can be financed with a personal loan or a private party auto loan.
Improve Your Credit Score
Raising your credit score takes time, so it won’t help you get car financing in the short term. But increasing a poor credit score by paying off credit cards and always making monthly payments on time will eventually improve your FICO® score. As your score increases, it will open the way to getting better rates and increase your chances of getting approved.