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How to get a Car Loan With Bad Credit

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How to get a Car Loan With Bad Credit

It’s possible to find an auto loan with bad credit, however it could come at a high cost.

Shannon Bradley Shannon Bradley Lead Writer | Personal finance, car purchases, loans Shannon Bradley covers auto loans for NerdWallet. While in college, pursuing the degree of a journalist, Shannon completed an internship that did not lead to the newsroom but to a bank marketing department. She spent the next 30-plus years as a content writer and content manager in the financial services industry writing educational content that covered a wide range of personal and business financial topics. After having been a reader of NerdWallet for a long time, Shannon welcomed the opportunity to join the NerdWallet team as a writer and assist more people in financial decision-making. Shannon lives at Newburgh, Indiana.

17 January 2023

Edited by Des Toups Lead Assigning Editor | Student loans, repaying college debt, financing the cost of college Des Toups leads the student loans and auto loans teams at NerdWallet and, prior to that, he led the personal loans and consumer finance teams. He has also led editorial teams at CarInsurance.com, Insurance.com and MSN.com and served as reporter and editor at The Seattle Times, Anchorage Daily News, Albuquerque Journal, Colorado Springs Gazette-Telegraph and Biloxi Sun Herald.

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Understanding what lenders are looking for can help you to secure a car loan with a lower interest.

In most cases being a bad credit holder, it won’t prevent you from finding a car loan.

But you’ll pay more — in the form of higher interest rates and fees as opposed to someone with good credit. This is because lenders are taking on greater risk when they make the auto loan to someone with bad credit, and they have to have to charge higher rates to cover that risk.

Here’s what you should know.

The steps to obtain an auto loan with bad credit

Although it can be difficult to get an auto loan in the event of low credit scores but you can boost your chances of getting one and reduce the overall cost of your loan.

Review your credit score and check your report

When you are applying to get a vehicle loan be aware of the credit scores of your customers and know where you stand. The two most frequently used scoring models, and , have a score range from 300 to 850. The credit tiers are different with each scoring model however, in general, you’ll find higher rates, fewer offers and more lender scrutiny with scores below the mid-600s.

Credit score

Average APR, brand new car

Average APR, used car

Superprime: 781-850.

3.84%.

3.69%.

Prime: 661-780.

4.90%.

5.47%.

Nonprime: 601-660.

7.25%.

9.81%.

Subprime: 501-600.

10.11%.

15.86%.

Deep subprime: 300-500.

12.93%.

19.81%.

Source: Experian Information Solutions.

While some auto lenders also use an industry-specific FICO model, your standard credit score and report can provide you with an idea of the types of loan offers to expect. It is free to access through NerdWallet, or you can receive a free credit report each year from each credit bureau at .

When you’ve got an accurate credit history, search at ways of improving the data lenders will consider to determine whether you’re eligible and at what percentage. Are there errors you can correct, such as accounts with past due payment that were actually in time? Do you have delinquent accounts that you can bring up to date? Do you have low-balance accounts that you could pay off?

Bad-credit auto lenders

Min. credit score 620

Min. credit score None

Min. credit score 575

Est. APR 5.74-18.54%

Est. APR 3.90-27.90 percent

Est. APR 3.94-21.00 percent

Loan amount $7,500-$500,000

Loan amount $1,000-$100,000

Loan amount $8,000-$100,000

>> MORE:

Show that you can afford loan payments

Lenders consider more than just your credit score. They search for indicators that you’re able to pay your loan on time and won’t be in default on the loan.

For instance, a loan provider will check to see whether you’ve previously had auto loans in the past and paid them back on time. If you have, that’s a strong positive factor in your favor. A repossession can be a huge negative.

Be ready to answer lender requests for documents regarding the following:

Sources of income . Provide evidence of income and employment by way of a printed pay statement that lists year-to-date earnings, if you can. For those with poor credit the lenders will require a single source of steady income from employment. Certain lenders will look at additional income sources like children’s support payments, Social Security benefits or disability payments , but usually not as the only income. Most lenders require it to be a gross annual income of $18,000, though there are lenders who will go further or don’t have a minimum.

Debt-to-income ratio . Lenders will take a look at you (your each month’s debt obligations, divided by your gross earnings). You might have difficulty getting a loan in the event that your DTI is higher than 45% to 50%. If you’ve settled your accounts and have less debt than your credit report suggests you should be able to prove this.

Credit utilization . If you already have loans or credit cards how much of the credit you’re using? Lenders typically want to see that borrowers are using less than 30% of their available credit. If your credit utilization appears to be greater, however you recently paid down balances, be prepared with evidence to prove it.

History of payments . Your history of making payments on time, especially for auto loans is a key element when lenders take loan decisions. Prepare to discuss the reason for any late payments, and the reasons for why it’s unlikely to happen again.

Payment-to-income ratio . This is a different measure of whether you can afford a car payment, plus car insurance. Your PTI ratio is calculated by adding the estimates of your car loan and insurance payment by dividing the total by your gross monthly income. Ideally the ratio should not exceed 20%.

Showing you can afford to pay for car loans helps with more than loan approval. It also helps you obtain a lower cost and more favorable loan terms.

Cut down on the amount you’ll have to borrow

In deciding whether or not to accept a car loan the lender will consider their potential loss in the event that you cease making payments or total the vehicle. If you can reduce that chance of loss by taking out fewer loans, you could improve your chances of loan approval. In addition to purchasing the cheapest vehicle, here are some other ways to borrow less:

You must make a down payment. Some lenders will require an upfront payment, particularly for those with poor credit. However, if they do not make it mandatory, consider putting some of your own money into the deal if you can. Along with cutting down on the amount you need to finance by a down payment, it also signals to the lender that you are committed to paying off the loan.

Transfer your car to a different. If you are able to trade in your car, take time to check guidebooks on the value of cars, such as Kelley Blue Book and Edmunds. Be prepared to , leaving less for you to finance.

Find a co-signer

A co-signer can be someone with good credit who agrees to make payments if you fail to pay for the loan. They provide a safety net for lenders that improves your chances to get loan approval. Certain lenders require a co-signer to be a part of the applicant of bad-credit auto loans.

A co-signer does not have any ownership stake in the vehicle However, they could be at risk of damaging their credit score if they miss payments or stop them altogether.

Having a co-borrower may also improve your chances of approval. A co-borrower has ownership in the vehicle and is equally responsible for making payments.

Comparison of lenders to find a low-credit auto loan

Do not choose the first lender who offers you a loan. Some lenders take advantage of bad-credit borrowers who are desperate to purchase cars, and then burden them with high interest rates charges, fees and the cost of the services that are hidden in a loan contract. If you don’t compare the offers of lenders, you’ll never be able to determine if you could have made better decisions.

Check out your bank or credit union first or read online reviews and discover auto lenders with a low — or no — minimum credit score minimum requirement. Do this before you ever go to a dealer. Eventually, your goal will be to get qualified loan offers from multiple lenders.

What might seem like tiny differences in interest rates could make a an enormous difference in the amount you pay. For a used car valued at $25,000 that is financed for 60 months at 9%, the payment is $518; at 14%, it’s $581. In the course of the loan the difference will be over $3,700.

An is a great way to compare the total cost of your loan choices.

Alternatives to paying more for a bad-credit auto loan

If you can’t get approved for a bad-credit auto loan, or the rates are too excessive, the best solution could be to defer purchasing a car, if you are able. Make use of this time to build your credit score, settle other loans and save money for a .

If you’re in need of a car now and can’t wait to buy a vehicle, your only option may be to take out a high-rate loan. In this case, you should focus on making your loan payments on time.

If you’ve got an average of six to 12 months history of on-time payments, you can look into . You can apply to several lenders, since they all have different specifications, and some may be willing to refinance at an lower rate, but another one won’t.

The author’s bio: Shannon Bradley covers auto loans for NerdWallet. She has spent more than 30 years in banking as a writer of financial educational content.

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