Auto Loans for Bad Credit

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Understanding bad credit auto loans

A bad credit auto loan is simply a regular auto loan with adjustments based on your credit. Usually, the biggest difference between regular auto loans and bad credit auto loans is that the APR is higher on a bad credit auto loan.

What is APR? The annual percentage rate, or APR, is the cost of credit, including interest and fees. The higher the interest rate, the higher the APR and the more you’re paying for the loan.

For example, someone with bad credit or “deep subprime” credit would pay $12,693 in interest, while someone with excellent or “superprime” credit would only pay $2,723 for the same five-year $20,000 used car loan. Check out the chart for more.

Category Credit Score Range Used Car Average Loan Rate Interest Paid
Deep Subprime 300 – 500 19.62% $12,693
Subprime 501 – 600 16.78% $10,649
Nonprime 601 – 660 10.91% $6,641
Prime 661 – 780 6.38% $3,753
Superprime 781 – 850 4.69% $2,723

 

Compare those costs with the costs of buying a new $20,000 car. In both examples, we’re basing costs on a five-year auto loan plus 10% in tax, title and registration fees with no down payment or trade-in vehicle.

Category Score Range New car Average Loan Rate Interest Paid
Deep Subprime 300 – 500 14.88% $9,320
Subprime 501 – 600 12.17% $7,476
Nonprime 601 – 660 7.91% $4,708
Prime 661 – 780 5.01% $2,916
Superprime 781 – 850 4.19% $2,423

Source: Experian State of the Automotive Finance Market Q4 2018.

Should you look at new or used cars? While APRs tend to be lower for new cars, beware that new cars are usually much more expensive and may require a down payment. Overall, you would probably pay more for a new car than a used car, even if your APR is higher for a used car loan.

How to find the best deal on a bad credit auto loan

Know your credit score. Knowing where your credit score falls on the scale of poor to excellent can help you to know which lenders to choose — some lenders will only work with customers who have good or better credit. You could look up your credit score for free in many ways. Your bank, credit union or credit card may have an option for free monthly, even weekly, updates. You could also sign up for MyLendingTree for a free credit check and tips to improve your score.

Choose some lenders. There are plenty of auto lenders offering bad credit auto loans, but it pays to do your research. We do not recommend “buy here, pay here” car dealers offering in-house lending, because they often charge extremely high interest rates and fees. Instead, consider some of these top-rated auto lenders.

Apply to multiple lenders directly. Don’t apply for a loan at the car dealership and accept the first deal it offers you. Dealers can make money by increasing your APR. Apply to a lender directly — lenders may include your bank, credit union or online lender. It does not hurt your credit to apply to several lenders any more than it does to apply to one lender, as long as you do all applications within a 14-day window. Shop around for an auto loan so you can compare offers and choose the best one for you. If the dealer can beat it, great; you’ll know you’re getting the best deal possible.

What to do if you aren’t approved right away

If you aren’t approved right away, you still have some options. The best option, usually, is to improve your credit. There are tons of ways to improve your credit, including paying down your debt. But if you need a car loan now and you weren’t approved, consider these options.

Get a cosigner. Ask someone you trust — and who trusts you — who has good credit to cosign the bad credit auto loan for you. By cosigning, they are agreeing that if you don’t pay the loan back, they will pay or else take a big hit to their credit score.

Get a personal loan for the full car price. If you are looking at a cheap car from a friend or off a site like Craigslist, a personal loan may be an option as a way for you to get the cash, buy the car and pay back the loan. Keep in mind that many personal loans also require at least fair credit and will typically be more expensive than an auto loan. You may be able to get an idea of what you qualify for by filling out an online form at LendingTree for personal loan offers from lenders based on your creditworthiness.

Get a personal loan for the down payment. If a down payment makes the difference between getting a car and not getting a car, a personal loan may help. Be extra cautious with this, however. Be sure that you can make both payments: what you’ll owe on the personal loan and your car payment. If you can’t, your car could be repossessed and your credit could get even worse. It may be much better to wait, save up your money and improve your credit score.

You could fill out an online form at LendingTree and receive up to five potential auto loan offers from lenders, depending on your creditworthiness.

Ask for a tier bump. If you receive an offer with a high APR, you could ask the lender for what’s known as a tier bump. Lenders classify loan applications into tiers. The higher your tier, the better the loan offer you may receive.

You could tell the lender some of the reasons you deserve to be bumped into a higher tier. Those might include low debt, high income, job stability or a previous car loan you paid off. You could also ask what it would take to get a tier bump. It may be a slightly higher down payment, a shorter loan term or a cosigner could make a big difference in your tier and your loan’s APR.

Pay a fair price for your new car. You are less likely to get a good APR if you are overpaying for your new car. Look up how much the car is worth using free tools like Kelley Blue Book and NADAGuides and don’t pay more than what it is worth.

Get rid of your old car. If you have an older car to get rid of, you could trade it in or sell it yourself and use the money you get from it as a down payment. It’s a good idea to negotiate the value of your trade-in after you have a firm price for what you’ll pay for your new car — that way, the salesperson can’t raise the price of your new car in exchange for giving you “more” for the old one.

Don’t focus only on monthly payments. Many car salespeople will want you to focus on monthly payments because they can slip in fees and other products you don’t need. It can also be hard to compare loan offers if different offers are for different loan terms, three years versus five years, for example. Look instead at the total costs — negotiate the price of the car and the price of the loan separately. By focusing on the lowest car price and the lowest APR possible, a favorable monthly payment will follow. You can read more on how to avoid common car-buying mistakes.

Ready to start your search?

You’re aware of the difference between good and bad credit car loans, you know how to shop around for the best deal and you have some options of what to do if you aren’t approved right away. With that information, it could be time to get shopping.