3 Consequences of Low Credit When Buying a Car or Home
Understand how low credit impacts major purchases like cars and homes, leading to significant financial drawbacks and hurdles in securing financing.
A credit score represents an individual’s creditworthiness, summarizing their financial history and behavior. A lower score signals a higher perceived risk to lenders. For significant financial commitments like purchasing a car or a home, this assessment is central to the lending process, helping lenders determine repayment likelihood.
Increased Loan Costs
A low credit score directly translates to higher financial outlays over a loan’s lifespan, primarily through elevated interest rates. Lenders charge more interest to individuals with lower credit scores due to a greater risk of default. For new car loans, excellent credit (781-850) might secure rates around 5.18%, while deep subprime credit (300-500) could face rates as high as 15.81% or more in 2025. For used cars, rates can jump from approximately 6.82% for excellent credit to over 21.58% for deep subprime credit.
This difference in interest rates leads to substantial additional costs. For example, on a $30,000 car loan, a borrower with a 5.18% rate pays thousands less over five years compared to someone with a 15.81% rate. For mortgages, the average 30-year fixed rate was around 6.58% in 2025. A lower credit score means a higher rate, potentially adding tens of thousands of dollars to a home’s total cost over 30 years.
Beyond interest, loans for individuals with low credit may also incur higher fees, such as increased origination fees. These fees further increase the overall expense of borrowing money, making financing a significant purchase more expensive for those with less favorable credit histories.
Challenges in Loan Approval
Low credit significantly increases the likelihood of loan application denial or restricts the pool of available lenders. Lenders often establish minimum credit score requirements, and applicants below these thresholds may be rejected. For instance, most borrowers approved for favorable car loan terms have scores of 661 or higher. A minimum credit score of around 620 is typically needed for most conventional mortgages, though some government-backed loans like FHA mortgages might allow scores as low as 500.
Even if an individual with low credit secures approval, their options are often limited. They might be forced to consider less competitive or higher-risk lending scenarios, such as “buy here, pay here” dealerships for car purchases, which often come with very high interest rates and unfavorable terms. The limited choice diminishes a borrower’s ability to shop for advantageous rates and terms. Additionally, taking on new debt, like a car loan, immediately before or during a mortgage approval process can negatively impact a borrower’s debt-to-income ratio and credit score, potentially jeopardizing mortgage approval.
Stricter Loan Conditions
Even if an individual with low credit successfully navigates the approval process, loan terms and conditions are often stricter. One common requirement is a higher down payment, demanding a larger percentage of the car’s price or home’s value upfront. For car loans, subprime lenders often require a minimum down payment of 10% or $1,000, whichever is greater, for those with bad or no credit. This can be a substantial financial barrier, as a larger initial cash outlay reduces the amount financed and the lender’s risk.
Another stricter condition is shorter repayment periods, which result in higher monthly payments. For example, a car loan for someone with low credit might be offered over 36 or 48 months instead of the more common 60 or 72 months available to those with better credit. This compressed timeline increases the financial strain on the borrower’s monthly budget. For mortgages, a borrower with low credit might be pushed towards a 15-year fixed mortgage rather than a 30-year term, leading to significantly higher monthly installments.
A common requirement for borrowers with low credit is the need for a co-signer. A co-signer is an individual, typically with good credit and a stable income, who agrees to take legal responsibility for the loan if the primary borrower fails to make payments. While a co-signer can improve the chances of approval and potentially secure better terms, it places the co-signer’s credit and financial well-being at risk. Should the primary borrower default, the co-signer becomes fully responsible for the debt, and their credit score will also be negatively impacted by any missed payments.