Can You Get a Car Loan With Collections?

Obtaining a car loan can seem challenging, particularly when past financial difficulties, such as collection accounts, appear on a credit report. While collections do present hurdles, securing an auto loan is often achievable by understanding the lending landscape and preparing accordingly. This guide explores the factors involved in getting a car loan with collections.

How Collections Impact Car Loan Eligibility

Collection accounts influence a lender’s assessment of creditworthiness for an auto loan. These accounts indicate a history of missed payments, directly impacting credit scores like FICO and VantageScore. Payment history constitutes a substantial portion of these scores, accounting for 35% in FICO and 40% in VantageScore models. This signals a higher risk of future default to lenders.

Lenders evaluate the nature and recency of collection accounts. Unpaid collections, especially recent ones, are generally viewed more unfavorably than older, paid, or settled accounts. Some credit scoring models, such as FICO Score 9 and FICO Score 10, disregard paid collections, and FICO Score 8 ignores collection accounts with balances under $100. Medical collections also receive different treatment, with paid medical debt and unpaid medical debt under $500 generally not appearing on credit reports.

The presence of collections typically results in a lower credit score, which directly correlates with higher interest rates on loans. For instance, in the first quarter of 2025, borrowers with credit scores between 300 and 500 faced average new car loan rates of 15.81% and used car loan rates of 21.58%. This contrasts sharply with excellent credit borrowers, who saw average new car loan rates around 5.18%. Lenders use these scores to gauge repayment ability, with lower scores indicating a greater perceived risk, leading to less favorable loan terms.

Strategies for Improving Your Loan Chances

Several proactive steps can enhance an applicant’s likelihood of loan approval. A significant down payment is an effective strategy, as it reduces the amount borrowed and lowers the lender’s risk. Lenders often require a minimum down payment, typically around 10% of the sales price, for those with lower credit scores. A larger down payment can also lead to a more favorable interest rate.

Securing a co-signer with good credit can improve approval odds and loan terms. A co-signer shares equal responsibility for the loan, reassuring the lender that payments will be made even if the primary borrower faces difficulties. This arrangement reduces lender risk. However, both parties must understand the obligation, as missed payments affect both credit reports.

Demonstrating stable income and a consistent employment history provides lenders with evidence of the capacity to repay the loan. Lenders assess income and debt-to-income ratios to confirm that monthly payments are manageable within an applicant’s budget. Presenting a personal budget can illustrate financial planning and a commitment to repayment. Before applying, reviewing credit reports from all three major bureaus (Equifax, Experian, and TransUnion) is also advisable to identify and dispute any inaccuracies. Correcting errors can improve credit scores.

Exploring Lender Types and Loan Options

Exploring various types of lenders can broaden available options. Dealership financing, particularly “buy here, pay here” (BHPH) establishments, often caters to individuals with challenging credit histories. These dealerships offer in-house financing, acting as both seller and lender, simplifying the approval process. While convenient, BHPH loans typically come with higher interest rates and may have less flexible terms.

Credit unions frequently offer more flexible lending criteria than traditional banks, making them a suitable option. Being member-owned institutions, credit unions may prioritize individual circumstances over strict credit score cutoffs. They can sometimes provide lower interest rates and more personalized service. Online lenders specializing in subprime auto loans also exist, offering another financing avenue. These platforms often have streamlined application processes and offer competitive, albeit higher, rates for those with lower credit scores.

Smaller local banks might also review applications on a case-by-case basis, offering more personalized consideration than larger national banks. Regardless of the lender type, individuals with collections should anticipate higher interest rates due to the increased risk perception. For instance, average interest rates for borrowers with credit scores between 501 and 600 ranged from 13.22% for new cars to 18.99% for used cars in the first quarter of 2025.

Key Considerations for Your Car Loan

Upon receiving a loan offer, meticulously review the terms and conditions. Loans with collections typically carry higher annual percentage rates (APRs), which significantly increase the total cost of borrowing. For example, a borrower with a 500 credit score might pay over $12,000 in interest on a $20,000 used car loan over five years, compared to under $8,000 for someone with a 650 score. Understanding the APR, which includes the interest rate and any loan fees, is essential to grasping the true cost.

The loan term length also affects affordability and cost. While longer terms result in lower monthly payments, they lead to more interest paid over the life of the loan. Conversely, shorter terms mean higher monthly payments but reduce the total interest burden. Be aware of any additional fees, such as origination fees, processing fees, or prepayment penalties.

Reading the fine print of the loan agreement is crucial to avoid unexpected charges or unfavorable clauses. This includes understanding the collateral agreement and any conditions related to default. Finally, making timely payments on the car loan can rebuild credit. Consistent on-time payments demonstrate financial responsibility and positively impact credit scores, opening doors to more favorable lending terms.