You can get a car loan with bad credit but you need to know how the system works
The car makers are in trouble. Sales for new and used cars have fallen for consecutive years and prices are coming down.
That’s good news for car buyers but it doesn’t make it any easier to get a car loan.
Worse still is that lending requirements for auto loans haven’t gotten any easier. Dealers and traditional financing is still closed to many people with bad credit.
But you can get a loan if you know the process and how the system works. I’m revealing actual car loan data on credit scores as well as the average loan rates before showing you how to get a loan with any credit score.
What Credit Score Do You Need to Buy a Car?
If you’ve ever been denied a loan, you know how frustrating the experience can be. Credit scores have increased since the financial crisis but lenders are still shutting people out from getting the money they need.
Fortunately, the credit score you need to get a car loan is lower than that required to get other loans for which you might have applied.
According to credit bureau TransUnion, the average credit score on new car loans was 720 FICO last year. That’s well above the average FICO of 660 reported for used car loans. It makes senses. New car loans are going to be for higher amounts and usually longer terms, something lenders will require a higher credit score to approve.
By way of reference, the FICO credit score ranges from 300 to 850 though you rarely see scores as high or low as the extremes. In fact, even after a bankruptcy and other negative marks on credit, most people with bad credit will still have a score above 550 FICO.
That average credit score on car loans hides the fact that you can get a loan with a much lower score, even if you have bad credit.
The same report by TransUnion showed that at least one-in-five new car loans were made to people with a 600 credit score. That’s well under the 660 FICO usually used as the defining point between good and bad credit.
How the Car Loan Process Works
While you can qualify for a car loan on bad credit, it helps to know the loan process to make sure you have every opportunity. Being able to control the process gives you the power to choose the lenders that can offer the best rate and avoid those that are just going to deny your loan.
Avoiding the lenders that will deny your loan is an important point most borrowers don’t understand. Every time you apply for a loan an get denied, it goes on your credit as an attempt to borrow money. When new lenders look at those attempts piling up, it becomes less likely they are going to loan you money.
Is a bank going to lend money to someone that has already been denied by several others?
1) Before applying for a car loan, you’ll want to check your credit and credit score. If you haven’t checked your credit report in more than a year, you can check it free through AnnualCreditReport.com (the only truly free credit report website).
This won’t show you a credit score but it will give you an idea of why your FICO score may be high or low. If there are any bad marks on your credit report, you can use some of these credit score hacks to increase it quickly.
Getting your credit score before applying for a car loan is usually easiest through a credit card program. Most credit cards offer a free service that will update you monthly on your credit score.
2) Next in the car loan process is to understand how much car you can afford. Most people do this by looking at how much money they have left in their budget for monthly payments.
Of course, the problem here is that draining your budget on the most expensive car you can afford means you run into trouble if your income falls or other bills come up. Instead of getting a loan for as much as you can afford, be sure to leave at least a few hundred dollars in your budget for just-in-case money.
Once you start looking at loan offers and interest rates, you’ll be able to use this budget information to know exactly how much car you can afford.
3) Next in the car loan process…is to go car shopping! Now I know everyone loves that new car smell. Everyone wants to go look at new cars and with interest rates at historic lows, why not?
Those new car prices, easily $20,000 or more, come with huge monthly payments. It always amazes me, listening to the Dave Ramsey call-in show, how much people are paying each month on their new car loans.
You can get a used car that’s just a few years old, that still looks and feels like a new car, except at half the price.
I’m not going to tell you what car you should buy or that you can’t buy a new car. I want you to find a car that not only is within your budget but will also leave you room for saving and emergencies.
One thing I will suggest, shop your car loan around instead of financing directly from the dealer. That’s how the dealers make their money, offering cars at a lower price but then collecting thousands on interest payments.
Instead, shop your loan around on a website like PersonalLoans.com, a loan aggregator that works with dozens of lenders to find the lowest rate available. The website works with different types of loans including personal loans, peer-to-peer and traditional banks to get you approved.
4) Once you’re approved for a loan, you’ll be able to pick a payment plan and a monthly payment. Car loans are available from three- to seven-years and rates between 5% to 32% APR depending on your credit score.
Money from a personal loan is deposited directly into your bank account, usually in a few days. You can then use it for whatever purpose including buying your car and paying off some of your high-interest debts.
Average Car Loan Rates
If you qualify, and I’ll share some tips on that later, car loan rates are going to depend on your credit score, loan size and term.
I’ve collected TransUnion data to show average car loan rates by credit score in the table below. You’ll notice that new car rates tend to be lower than used cars. Don’t let this convince you into getting a new car instead. The higher price you’ll pay on a new car will still mean thousands in interest on a loan.
Looking at the rates in the table, you can see that even someone with bad credit in the range of 500 to 600 FICO can still get approved for a loan on rates well below what you see on a credit card.
I’ve linked a loan payoff calculator here to help you compare different loans. For example, a $15,000 car loan at 18% for five years will cost you over $24,150 in interest and principal. Compare that to a personal loan at 14% and you’ll save over $3,500 in interest.
How to Get a Car Loan with Bad Credit
Getting a car loan on bad credit means understanding where to apply for a loan and how to play the system to get lower rates. There are several personal loan websites that work specifically with bad credit borrowers including BadCreditLoans and PersonalLoans.
Both these sites allow you to shop your loan around to different lenders and get the best rate available. Getting approved for a loan at lower rates comes down to a couple of different tricks you can try:
- Shorter-term loans of three years will offer lower rates and an easier approval process though payments will be higher.
- Smaller loan amounts come at lower rates and are more often approved so consider saving up for a higher down-payment.
- Paying off your credit cards with a consolidation loan can help increase your credit score by removing the bad debt on your credit report.
Getting a car loan is possible even with bad credit but you need to know how the system works to get approved and get the best rates. It’s easier to get a car loan compared to other loans but rates are often higher unless you know what to look for. Make sure you shop your car loan around and borrow only as much as you can afford.