Quick Answer
Buying a car with bad credit may take more planning, but you still have options. Steps such as finding a co-signer, saving for a down payment and comparing lenders may help you find an auto loan with terms that fit your financial needs.
Having reliable transportation is important, but buying a car with bad credit can be challenging. Your credit score may affect the types of auto loans you qualify for, as well as your interest rate, loan terms and monthly payments.
However, having a low credit score doesn’t necessarily mean buying a car is out of reach. While financing options may be more limited, there are steps you can take to improve your chances of qualifying for an auto loan and finding terms that fit your budget. Here’s what you need to know before you start shopping.
Can you buy a car with bad credit?
You may be able to buy a car with bad credit. Some lenders offer bad credit loans for borrowers with poor credit or limited credit history, but these loans may come with higher APRs, larger down payment requirements or less flexible loan terms.
Lenders may also look at your income, debt, employment history, down payment and whether you have a co-signer.
It’s often possible to get a car loan without a co-signer when you have bad credit, but it is more difficult. Many lenders perform a credit check to determine loan approval. With bad credit and no co-signer, you may have trouble getting approval from the top auto loan companies. Any offers you get may come with higher interest rates.
What credit score do you need to buy a car?
There is no single credit score required to buy a car. Each lender sets its own loan requirements, and some lenders work with borrowers who have low credit scores, poor credit or no credit history.
In general, a higher credit score may help you qualify for lower interest rates and better loan terms. A lower credit score may lead to a higher interest rate, which can increase your monthly payments and total loan cost.
Payment history is the biggest factor that determines your FICO® Score. If you make on-time payments and your lender reports to the credit bureaus, you may build a positive credit history over time, which could help improve your credit score. However, if you make late loan payments or fail to make required payments, your credit can take a negative hit.
How to buy a car with bad credit: A 10-step guide.
Buying a car with bad credit may feel challenging, but preparing before you shop can help. Checking your credit report, setting a realistic budget, saving for a down payment and comparing lenders may help you find an auto loan with terms that fit your financial needs.
1. Check your credit report.
Start by reviewing your credit report before you apply for an auto loan. Look for inaccurate and outdated information or accounts you do not recognize.
If you find an error, you can dispute it with the credit bureaus. Removing inaccurate negative information from your credit report may improve your credit score, which could help you qualify for an auto loan.
2. Set a realistic budget and monthly payment.
Before choosing a new or used car, decide what monthly payment fits your budget. Remember to include more than the loan payment.
You may also need to budget for:
- Insurance
- Gas
- Registration
- Maintenance
- Repairs
- Parking or tolls
3. Save for a down payment.
A down payment can reduce the amount you need to borrow. This may lower your monthly payments and could help you qualify for better loan terms.
A larger down payment may reduce the lender’s risk because you’re borrowing less. Depending on the lender, this could improve your chances of qualifying or help you receive more favorable loan terms. Even a smaller down payment can help reduce the total cost of borrowing.
You may be able to get a car without a down payment in some situations. Some lenders offer “no money down” financing options for borrowers with bad credit. These types of loans may come with higher interest rates and longer repayment terms, which may increase the overall cost of borrowing.
Saving money takes time and can be difficult, but a down payment may be worth it if it helps you qualify for a lower interest rate.
4. Get preapproved before you shop.
Preapproval can help you understand how much you may be able to borrow before visiting a dealership. It can also give you a clearer idea of your possible interest rate, APR and monthly payments.
Getting preapproved does not guarantee final approval, but it can help you shop with more confidence.
5. Consider a co-signer.
A co-signer with stronger credit may help you qualify for an auto loan or receive better terms. This can be helpful if you have poor credit, no credit or limited credit history.
A co-signer takes on serious responsibility. If you miss payments or default on the loan, the co-signer may be responsible for repaying it, and their credit may also be affected. Make sure both people understand the loan terms before signing.
6. Shop around and compare lenders.
It’s a good idea to compare options instead of accepting the first offer you get. Banks, credit unions, online lenders and dealerships may all offer different rates and terms.
When comparing bad credit car loans, look at:
- APR
- Monthly payments
- Loan length
- Fees
- Down payment requirements
- Prepayment rules
- Total cost over time
A lower monthly payment may sound appealing, but a longer loan term can increase the total amount you pay.
7. Consider a used car.
A used car may cost less than a new car, which can reduce how much you need to borrow. It may also help keep monthly payments more manageable.
Before buying, review the vehicle history report and consider having the car inspected by a trusted mechanic. A lower price is helpful only if the car is reliable enough for your needs.
8. Be cautious with buy here, pay here dealers.
Buy here, pay here dealers may offer financing directly to borrowers with low credit scores. This can sound convenient, but these loans may come with higher interest rates, fees or strict payment terms.
Before signing, review the full agreement. Make sure you understand what happens if you miss a payment, including any risk of repossession.
9. Choose a shorter loan term.
A shorter loan term may lead to higher monthly payments, but it can reduce the total interest you pay. A longer term may lower the monthly payment, but it can cost more over time.
Choose a loan term with monthly payments that fit comfortably within your budget without extending repayment longer than necessary.
10. Plan to refinance later.
If you buy a car with bad credit, you may not qualify for the lowest interest rates right away. Over time, you may be able to refinance if your credit improves or market rates change.
Refinancing may help you qualify for a lower interest rate or reduce your monthly payment if your financial situation has improved. However, refinancing may also come with fees or extend your repayment timeline, which could increase the total amount of interest you pay over the life of the loan. Review the new loan terms carefully before deciding whether refinancing is right for you.
Mistakes to avoid when buying a car with bad credit.
When buying a car with bad credit, it helps to slow down and review the details. A rushed decision can lead to a loan that is difficult to manage. Taking the time to compare lenders, understand your loan terms and evaluate the total cost of borrowing can help you avoid common pitfalls and make a more informed decision.
Common mistakes include:
- Focusing only on the monthly payment.
- Ignoring the APR and total loan cost.
- Not reviewing your credit report before applying.
- Not comparing multiple lenders.
- Choosing a car that stretches your budget.
- Signing before reading the full loan terms.
- Overlooking fees, penalties or the lender’s repossession policy.
- Assuming your first loan offer is your only option.
Final Thoughts
Buying a car with bad credit may take more planning, but you still have options. Checking your credit report, comparing lenders and choosing a realistic monthly payment can help you make a more informed decision.
An auto loan that fits your budget may help you get reliable transportation without making your finances harder to manage. Take time to review your options, understand the terms and figure out what works best for your financial situation.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
