How to Get a Car Loan with Bad Credit

How to Get a Car Loan with Bad Credit

You dream of owning that little sports car you’ve been eyeing, but what if you have bad credit? Poor credit could shoot down your dreams if you need a car loan to fund that cool drive. But don’t give up yet! You can take steps to get a loan, even if your credit isn’t stellar. Here are a few ways to increase your odds of getting a car loan with bad credit.

Start with Your Credit Union or Community Bank

A large national bank isn’t the only answer if you’re worried about your credit standing. In this case, smaller and local is better. If you have an account in good standing with a credit union or community bank, you might get an auto loan even if your credit score isn’t ideal. Why? Because these smaller financial institutions take a more personal approach to working with customers with poor credit–approaching each situation as unique and evaluating factors beyond the borrower’s credit score, such as your income and financial position. You’re also much more likely to get approved if you have a long banking history with them or live in the area they serve. See what’s available in your area

Try a Credit-Builder Loan

If you have bad credit, getting a car loan is more challenging. Typically, lenders want you to have at least a fair credit score to get an auto loan. Credit-builder loans are a way to improve your credit score. Here’s how they work. First, the lender puts money into a savings account on your behalf and then gives you a certain amount of time to pay it back. Then, as you make payments, they release the money from the savings account and pay it back to you. 

Some credit unions and community banks offer these loans, but you can also find some online lenders. Best of all, they’re explicitly designed to help people with poor credit build up their credit scores. In addition, most lenders will report your payments to the major credit bureaus (as long as your state allows them to do so), helping you improve your score over time.

Enlist the Help of a Car Dealership

It’s possible that a car dealership can help you if you choose your dealership wisely. First, contact several dealerships to determine if they can offer financing options. Then, compare the interest rate they offer with what other lenders offer. You might also want to see if the dealership is willing to broker a deal with your bank or another lender ready to provide you with financing–they might negotiate a lower interest rate for you than you could have gotten on your own. Another option is to look online for a lender specializing in loans to people with bad credit.

Take Time to Improve Your Credit

First, check your credit score and see where you stand. For example, a credit score of 720 and above is good, while getting a car loan with a credit score below 550 will be a challenge. 

Factors that go into calculating a credit score:

  • Payment history
  • Credit utilization
  • Length of credit history
  • A mix of accounts (credit cards, student loans, etc.)
  • Number of recent inquiries

To improve your credit score:

  • Pay off your debt on time.
  • Pay off debts with high-interest rates first.
  • Consider consolidating debt if you have multiple loans or balances at different interest rates.
  • Don’t close unused accounts because they can help your length of credit history, which affects your score.

Paying off the total balance on your credit card monthly is ideal, so you don’t have to pay interest charges. But doing so won’t necessarily affect your utilization rate (the amount of available credit used) and, therefore, won’t affect your ability to get a car loan or drive down the interest rate for one.

If you can put off buying a new car to a later date, start working on your credit score now, so you’re ready. 

Save for a Bigger Down Payment

Continue saving. If you want to get an auto loan with bad credit, your best bet is to save as much as possible and put that money toward the down payment. The larger your down payment, the lower your monthly payments will be (and the less interest you’ll pay over time). They typically charge a higher interest rate when you get a loan with bad credit. Larger down payment will lower your interest rate, as it shows the lender that you have more skin in the game and are less likely to default on your loan.

The Bottom Line

It’s never easy to overcome a bad credit history, but if you pay down your balances on time, this resets the clock on your credit report. Regardless, getting a car loan with bad or no credit doesn’t have to be impossible. Even if you have been turned down before and have little hope of getting approved, some options are still available to help you get back on the road with wheels.


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