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How to Get a Good Car Loan with Bad Credit

Jun 20, 2021 4 min read John Schmoll

Key takeaways

  • Save up for a 10% or 20% down payment.
  • Visit local banks and credit unions to shop around.
  • Be wary of predatory lenders and scams.

 

Having bad credit can make a big purchase, like buying a new or used car, feel even more daunting than it already is. Whatever your credit standing, some salespeople who want to get you into a car that’s good for their paycheck may use high-pressure tactics that will take a huge bite out of your paycheck.

Avoid scams and subpar loan options with these tips on how to get a car loan with have bad credit.

 


Save up for a sizable down payment

The most important factor in getting a car loan, regardless of your credit, is to finance the least amount of money possible. The less you need to borrow for your car, the less you will end up paying for that car over the life of the loan. Aim to save 20% for a down payment on a new vehicle and 10% for a down payment on a used vehicle. If you secure a loan with no money down, it means you’re financing the entire cost of the vehicle.

A solid down payment is also a good idea if you have bad credit because it’s a smaller risk for the lender and shows that you’re working to improve your finances. Lenders review your credit score to determine your credit risk. Visit my free credit report to see how you can get a free copy of your credit report.

Credit scores range from 300 to 850, and one of the most well-known is called a FICO score. A good FICO score is generally considered to be anything above 670.

  • If your score is 740-799, you’ll likely get lower rates on loans from lenders
  • if your FICO score is 580-669, you are considered to be a subprime borrower and may get a higher interest rate on your car loan, making the car cost more over time.
  • If your FICO score is 300-579, you may have difficulty getting approved for a loan.

In addition to your credit score, your debt to income ratio (DTI) can be a significant factor for lenders, especially on large purchases like a car or home. This important financial figure expresses the amount of debt you have in relation to your overall income.

It’s calculated by dividing your total monthly debt by your gross monthly income. In general, the lower your DTI, the more attractive you are to lenders. Also, the less debt you take on through a potential loan, the lower your DTI will be and the more likely you are to be approved for your car loan.

 

Consider trading in your current vehicle

If you can’t afford a down payment, a trade-in could help you get a better loan. If you are replacing an older car, research your car’s value before you go to a dealership. Kelley Blue Book and Edmunds are good sources for determining the value of your trade-in.

If a dealer won’t give you a fair trade-in value, consider selling it yourself on eBay, Craigslist, or even Facebook. Ask for payment in cash or a banker’s draft to avoid scams. Then, use that money as a down payment on your new vehicle.

 

Stop by your local bank

You’ll probably shop around for your car, and you should do the same with your car loan. The dealer isn’t the only place where you can secure financing.

Consider applying for a car loan at a local bank or credit union, especially if you have accounts with them. They can offer competitive rates, and you’ll be able to enter the car dealership with financing already figured out. Plus, once a dealer sees that you are pre-approved, they may feel incentivized to find you a better loan through their finance department. If you rely on the dealership to help you secure financing, you may not get the best interest rate.

 

Don’t rule out a co-signer

If, after shopping around for a car loan, you still don’t have a good option, consider asking someone you trust—and who trusts you—to co-sign on a loan. However, understand that asking someone to co-sign on a car loan is a serious proposition.

If you fall behind on payments, your co-signer will be responsible for paying off the loan. Such a situation could negatively affect your co-signer’s credit and your relationship, so be sure you're able to cover the debt before taking out a loan with a co-signer.

 

Work to improve your credit

If, after all of the above, you still can't get a decent car loan due to bad credit, the best thing to do may be to put off car shopping and focus on improving your credit score. Avoid “No Credit Check” and “Buy Here Pay There” car lots; these predatory institutions could charge you upwards of 20% interest on your car loan, which isn't worth it.

Instead, repair bad credit with some good habits.

  • Pay all of your bills on time every month. Late payments or non-payments can negatively impact your credit. Fortunately, as more time passes since a late payment, the impact lessens.
  • Pay down your credit card debt, live within your means and pay off what you charge in full each month. Using a big chunk of your available credit lowers your credit score. Chip away at your debt and avoid accumulating more credit card debt.
  • Consider becoming an authorized user. If you have a friend or family member with good credit who’s willing to add you as an authorized user on one of their credit cards, that can help raise your credit score, particularly if you have a slim credit file or need help rebuilding bad credit. First, check with the credit card issuer to make sure that they report on authorized users to the credit bureaus. Also make sure you or the primary cardholder pay off the balance in full every month.
  • Minimize hard inquiries on your credit file. Hard inquiries occur when you apply for a new line of credit such as a loan or a new credit card. Soft inquiries are not tied to an application for new credit and do not impact your credit score. These can include when a current creditor or potential employer checks your credit. Hard inquiries temporarily lower your credit score, so don’t apply for lots of credit cards or loans if you’re trying to improve your credit before taking out an auto loan.
  • Save for a down payment so that you can eventually buy a car.

     

What you can do next

Check your credit report and take a good look at your monthly budget. Determine how much money you can afford for a monthly loan payment and calculate a reasonable price range for your car search.

Footnotes

John Schmoll is the founder of Frugal Rules, a finance blog covering investing, budgeting and frugal living. He is a father, husband, and veteran of the financial services industry who's passionate about helping people find freedom through frugality.

 

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