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How to Buy a Car With Bad Credit

By:
Amarilis Yera
11 min read
- Money; Shutterstock
Money; Shutterstock

When it comes to auto loans, most lenders will require good or excellent credit, leaving buyers with bad credit with few financing options. However, if that’s your case, there are some options. For example, some creditors are willing to work with subprime borrowers. And if you can't find a favorable loan, saving up to buy a car from a private seller could also be a solution.

Read on for ideas on how to buy a car if you have bad credit.

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How to get a car loan with bad credit

Bad credit can make getting approved for an auto loan challenging. Most banks might deny your applications, but some lenders do offer options.

Financing the car purchase with a personal loan for bad credit is also an option. However, personal loans generally have higher interest rates than car loans—and having bad credit could increase the rates even more.

There are things you can do to increase your chances of approval, however. But to start, it’s important to find out what exactly most lenders require.

What credit score do you need to buy a car?

Loan requirements vary between financial institutions and lenders rely on different credit scoring models, so there isn't a specified minimum credit score to buy a car. However, most creditors use the FICO score system and prefer prime and super-prime borrowers, that means those with scores of 660 or higher. These people are considered less likely to default on a loan, so they have better approval odds for higher loan amounts and lower interest rates.

Those with FICO scores between 620 and 659 (near-prime borrowers) also have good approval odds. However, anyone below 620 will be considered a subprime borrower. Creditors consider near-prime and subprime borrowers a higher risk, so they'll set higher interest rates—or simply deny their loan applications.

Do note that your credit score, also known as credit rating, isn't the only factor lenders consider. Your credit report, income, debt-to-income ratio, credit utilization ratio and employment background also come into play.

Check your credit report

Reviewing your credit report can help you spot inaccurate information that may be hurting your credit score and approval odds.

You can request a free copy of your report from each of the three major credit bureaus (Transunion, Equifax or Experian) through AnnualCreditReport.com. Once you have your reports, check your payment history for any erroneously marked late payments or accounts that might not belong to you.

To learn more, read our guide on how to read your credit report. And if you find inaccurate information, follow the steps outlined on how to remove negative items from your credit report or consider hiring a credit repair company.

Consider getting a co-signer

A co-signer, or co-applicant, is a person who agrees to pay back a lender if the primary borrower were to default on a loan. This person should have good or excellent credit so they can help you increase your approval odds or even get better loan terms.

Lower your debt-to-income ratio

In addition to your credit score, lenders consider your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward paying your existing debt. This indicator helps them assess whether you can afford new monthly loan payments.

To calculate your DTI, add up your monthly debt (mortgage, loans and credit card bills, for example). Then, divide the total by your gross monthly income. (Alternatively, you can use our debt-to-income ratio calculator.)

Generally, creditors prefer borrowers with a DTI of around 40% or less. To lower your DTI, you'll need to reduce your overall debt or increase your monthly income.

Save for a large down payment

A sizable down payment can improve your approval odds and loan rates by reducing your loan-to-value ratio (LTV). The LTV is a measure of how much money you need to borrow compared to the actual value of the vehicle.

The lower your LTV, the less risky you are to lenders. That's because a low LTV makes it unlikely that the amount you owe throughout the life of the loan will ever exceed the car's worth. So, if you default on the auto loan, the lender can repossess the vehicle, sell it and recoup its losses.

There isn't a specific down payment percentage required for people with bad credit. However, a down payment of at least 10% of the car's value is recommended.

Try to get pre-approved

Getting pre-approved for a car loan can provide you with some key information, such as the loan amount a creditor is willing to lend you. This establishes a budget you can work with, which can help you find the best car deals within your price range and negotiate with sellers.

Bear in mind that some creditors do a hard inquiry (or hard credit check) to pre-approve loans, which could trim a few points off your credit score.

Check out our guide on how to get pre-approved for a car loan for detailed steps.

Compare lenders

Traditional banks and credit unions typically only lend money to borrowers with excellent or good credit. However, consider talking with a customer representative from your financial institution as they might offer loans for existing customers with poor credit scores.

If not, there are some online lenders and lending platforms that offer loans for people with bad credit. These companies sometimes provide a pre-qualification through their websites, which shows an estimated loan amount and rates you may qualify for based on self-reported information. Note that a prequalification ultimately doesn't guarantee you'll be approved for the loan.

Some car dealerships might give you the option of financing directly with them. However, keep in mind that the dealership might require a heftier down payment and may quote you a much higher interest rate and monthly payments.

Consider improving your credit first

If buying a new car can wait, it’s a good idea to improve your creditworthiness before applying for an auto or personal loan. Taking the time to repair bad credit can help you get a lower interest rate and potentially save you hundreds — sometimes thousands — of dollars throughout the life of the loan. If you’d like to take this route, check out this guide on how to improve your credit score.

How to buy a car from a private seller

While new car prices are hitting record highs, used cars are now selling for much less than before. If you don't qualify for a traditional or bad credit auto loan, consider buying a used vehicle with cash through a private seller.

However, used car buyers should be diligent. If possible, get a vehicle history report from the seller and have the car inspected by your preferred mechanic. Note that while most states have so-called “lemon laws” — provisions that protect consumers financially if they buy a new car with major mechanical defects — only a few have the same type of laws for used cars.

Beware buy here, pay here dealerships

Buy-here, pay-here dealerships offer in-house financing, issuing loans directly to consumers without a bank or credit union acting as a middleman. These dealerships usually advertise their loans as “no credit check” options, making them attractive to people with low credit scores.

However, this type of auto financing comes with even higher interest rates than average bad credit car loans. It may also require you to make car payments weekly or biweekly instead of monthly.

Only consider these dealerships as an option if buying a car can't wait until you work on improving your credit.

How to lease a car with bad credit

Leases are ideal for those who want to trade in their vehicles every few years. However, car dealerships and lenders evaluate your credit history when you apply for a lease, so they're not an ideal option for car buyers with poor credit.

If you're still interested in leasing a car, you should follow the same steps mentioned in How to get a car loan with bad credit.

Summary of Money’s How to Buy a Car With Bad Credit

 

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