Your financial past sometimes has a way of interfering with your financial future.
This is definitely true when it comes to securing financing for big expenses like a car.
Depending on where you live, having a car can be necessary — a need, not a want..
Yet, if you have a poor credit history — perhaps you’ve maxed out your credit cards or missed a few debt payments — it can be difficult to secure a car loan.
Can You Get a Car Loan With Bad Credit?
Fortunately, it is possible to get car loans with bad credit. Your options may not be as abundant or as favorable as if you had good credit or excellent credit, but opportunities to get an auto loan with bad credit do exist.
You may have a higher interest rate and end up with higher monthly payments and more money going to interest over the life of the loan. You may have to put down a higher down payment. You may need to ask a trusted friend or relative to co-sign for your loan. But getting a car loan with bad credit is doable.
What Role Does Your Credit Score Play in Getting an Auto Loan?
Lenders check credit scores and credit history to gauge the likelihood of you paying back your loan in a timely manner.
If you have a history of missing payments, maxing out credit cards or defaulting on loans, lenders may not see you as a responsible borrower — similar to how you may think twice about loaning money again to a friend who didn’t pay you back when he said he would.
Some lenders even have a minimum credit score threshold in place for borrowers.
Your credit score isn’t the only factor lenders will consider when evaluating whether to give you an auto loan. They also may look at your income, your employment stability and your debt-to-income ratio.
A borrower with a low credit score but a high income, who has been with the same employer for over two years and has a debt-to-income ratio under 45% would be more favorable to lenders than a borrower with the same credit score but who is only making minimum wage, has experienced long periods of unemployment and who has a very high debt-to-income ratio.
What Is Considered ‘Bad Credit?’
Credit scoring models vary, but anything below 600 — or sometimes below 580 — is typically considered a bad credit score.
A credit score below 700 — or sometimes below 670 — is usually considered a fair credit score, which is better than having bad credit but is not as favorable as having good or excellent credit.
It can be more difficult to get an auto loan if you have fair or bad credit, but there are steps you can take to make it happen.
How to Get a Car Loan With Bad Credit
Here’s what to do if you need to finance a car and you have bad credit.
1. Check Your Credit
Don’t wait for potential lenders to tell you what your credit score is. Before applying for car loans, be sure you know what’ll show up when lenders perform a credit check.
If you’ve been making consistent debt payments, there’s a chance your credit score has gone up since the last time you checked.
There’s also the possibility that there’s an error in your credit reporting history that is bringing down your score. You can dispute errors with your creditors and the three credit reporting bureaus — Equifax, Experian and TransUnion.
Get a free copy of your credit report from each credit reporting bureau at AnnualCreditReport.com..
2. Check Your Debt-to-Income Ratio
Having a low debt-to-income ratio is ideal for getting car loans. Auto lenders typically look for a debt-to-income ratio less than 45%, though some set their cap at 50%.
To figure out your debt-to-income ratio, you divide your minimum monthly debt payments by your monthly gross income (what you make before taxes, Social Security and health care premiums). Take that number and multiply it by 100 to get your debt-to-income ratio as a percentage.
If your debt-to-income ratio is too high, you have two options: Reduce your debt payments or increase your income. See if you can quickly pay off a credit card with a low balance, or look into getting a regular side gig. Asking your boss for a raise is another way to boost your income.
3. Determine What Car Payments You Can Afford
Owning a car might be necessary to get you to and from work or school, but you need to make sure your car purchase won’t put you in an even worse financial situation.
Your auto lender will offer you loans based on what they believe you’ll be able to pay back, but only you know what you can truly afford.
If you don’t already follow a monthly budget, now’s the time to start one. Subtract your monthly expenses from your monthly income to determine how much disposable income you have to go toward car expenses.
Be aware, it’s not just loan payments you need to budget for. You’ll need to pay for car insurance and gas —and potentially parking and tolls — on a regular basis. You should also be setting aside money for future car maintenance and repairs, especially if you’re purchasing an older, used vehicle.
Knowing how much you can afford for a car will help you choose the best vehicle and loan offer.
4. Save up for a Down Payment
Having a significant down payment means you won’t have to borrow as much and your lenders may view you as more financially capable.
The general rule of thumb is to put down 10% of the purchase price if you’re buying a used car and 20% if you’re buying a new car. If you can put down a larger down payment, it’s even better.
5. Get Quotes From Multiple Lenders
You’ll find the best deals for financing a car if you get quotes from multiple lenders. Research lenders with low credit score thresholds or who advertise offering bad credit auto loans.
You might check with your bank or credit union first, but also look into online lenders.
Compare each lender’s interest rate, down payment requirements, loan terms and fees. If the lender is pulling your credit to pre-approve your loan, make sure to do all your loan shopping within a two-week period, and your credit score won’t be dinged by multiple credit inquiries.
Another advantage of getting quotes from multiple lenders is that you might be able to negotiate with a lender and get them to improve their offer to beat a competitor’s.
6. Consider Using a Co-Borrower or Co-Signer
Buying a car with a co-borrower or a co-signer who has good or excellent credit will increase your likelihood of getting an auto loan with bad credit.
A co-borrower is someone who’ll own the car jointly with you — like if you’ll be sharing the car with a spouse or romantic partner. You’ll both take on the responsibility of making the monthly car payments.
A co-signer is someone who vouches for your ability to pay. This person would not own the car jointly with you, but they’d be responsible for the debt if you default on making payments.
While asking someone to be your co-signer or co-borrower can be crucial to getting a car loan with bad credit, you need to make sure that you’ll be a responsible borrower and won’t tank that person’s credit by missing payments or defaulting on your loan.
7. Read the Fine Print Before Signing the Loan Contract
After comparing loan offers and choosing the best one, you’ll provide the lender with additional documents and information, including:
A copy of your driver’s license
Proof of income
Proof of residence
Proof of auto insurance
Your car’s make, model and vehicle identification number (VIN)
Your car’s age and mileage
Read all the fine print of your loan contract so you’re aware of all the fees, like how much you’re charged if you submit a late payment.
You’ll also want to know if there’s a prepayment penalty fee, as you’d face that charge if you refinance your car later on.
8. Improve Your Credit and Refinance in the Future
Even if you accept a car loan with a high interest rate due to your bad credit, you don’t have to stick with that loan forever.
After purchasing your car, work at improving your credit score so that you can refinance your car with a better interest rate later.
Making monthly car payments on time and reducing other debt are two ways to boost your credit score.
Ways to Improve Your Credit Before Getting a Car Loan
If you have bad credit and don’t need a car immediately, it pays to try to improve your credit before trying to get a car loan in the first place.
Get a copy of your credit reports so you’re aware of all your outstanding debts, and you can dispute any errors that are showing up.
Build a budget that prioritizes paying off your debt and set up automatic payments so you’ll never miss a deadline.
Make extra payments toward your debt when possible. If you get a work bonus or unexpected money, put it towards your debt. Picking up a side gig can help you pay down debt faster.
Asking your credit card companies for a credit increase can also improve your credit score, because it’ll decrease your credit utilization — as long as you don’t use your credit increase to charge more on your card.
Spending six months to a year — or more — building up your credit means it’ll be easier for you to finance a car, and you’ll get a better deal.
Frequently Asked Questions
Each online lender, bank or credit union has its own criteria for car loans, so the lowest credit score you can have will vary from lender to lender.
When you are comparing lenders, make sure to inquire about their minimum credit score requirement.
You may qualify for a bad credit auto loan if you have a 500 credit score, but expect a high interest rate and other fees. Also, plan to put down a sizable down payment. Raising your credit score or using a co-signer will improve your chances of getting a more favorable car loan.
It can be very difficult to get approved for a car loan with a 300 credit score. Consider waiting to improve your credit score first or asking a trusted friend or relative to be a co-signer.
Nicole Dow is a senior writer at The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.