Can You Get a Car With Bad Credit?

Individuals with less than perfect credit can obtain a car loan. While options differ from those with excellent credit, avenues exist to secure vehicle financing. This article explores options and steps for acquiring a car with a challenging credit history.

Securing a Car Loan with Less Than Perfect Credit

Individuals with less than perfect credit can explore specialized lending avenues. Subprime lenders are a primary option, catering to borrowers with lower credit scores, typically FICO scores between 501 and 619. They assess risk based on factors beyond credit score, including income, employment stability, and debt-to-income ratio. Subprime loans generally come with higher interest rates to compensate for increased risk.

Credit unions are a viable choice for borrowers with varying credit histories. Many have programs to assist members who may not qualify for traditional prime loans. They often offer competitive rates and may work with individuals to find suitable financing, even for those with lower credit scores or limited history. Some provide pre-approval services that do not initially impact a credit score, allowing borrowers to understand potential loan terms.

Buy-here-pay-here (BHPH) dealerships offer in-house financing directly from the dealership. They often advertise “no credit, no problem” and can approve loans for individuals with poor or no credit. While convenient, BHPH loans typically involve higher costs and less flexible payment schedules, sometimes requiring weekly or bi-weekly payments. Vehicles at BHPH lots tend to be older and of lower value. It is important to verify if these payments are reported to credit bureaus to help build credit.

Steps Before Applying for a Car Loan

Before approaching any lender, prepare your financial situation to improve your chances of securing a car loan. Check your credit report from Experian, Equifax, and Transunion for accuracy. You are entitled to a free annual copy from each bureau through AnnualCreditReport.com. Reviewing these reports allows you to identify and dispute errors that could negatively impact your credit standing.

Establish a realistic budget, determining how much you can comfortably afford for the car and monthly payments. Assess your income and existing expenses to avoid financial strain. Lenders evaluate your debt-to-income ratio, typically preferring it under 50% for subprime loans.

A larger down payment can significantly benefit your loan application, especially with less-than-perfect credit. Lenders often require at least 10% for borrowers with poor credit. A larger amount (15% to 20%) can reduce the loan principal, lower monthly payments, and potentially secure a better interest rate.

Considering a co-signer can enhance your loan approval odds and potentially secure better terms. A co-signer, often a family member, agrees to take responsibility for the loan if the primary borrower fails to make payments. Their strong credit history provides added security for the lender, helpful if your credit is limited or challenged. The co-signer is legally obligated to repay the debt if you default, and their credit will also be impacted by the loan’s payment history.

Gathering all necessary documentation before applying will streamline the process. Lenders typically require:

• Proof of identity, such as a driver’s license or other government-issued photo ID.
• Proof of income, commonly provided through recent pay stubs, W-2 forms, or bank statements. Some lenders require a minimum monthly income of $1,500 to $2,000.
• Proof of residency, often a utility bill or bank statement with your current address.
• Proof of insurance, as lenders want to ensure their investment is protected.

Key Aspects of Your Car Loan Agreement

Understanding the fundamental components of a car loan agreement is important, particularly with less than perfect credit. The Annual Percentage Rate (APR) represents the total annual cost of borrowing, encompassing interest and certain fees. For borrowers with lower credit scores, the APR will typically be higher, reflecting increased risk to the lender. In early 2025, new car buyers with poor credit (300-500) faced average APRs around 15.81%, while used car buyers saw average APRs of about 21.58%.

The loan term, or duration, specifies the length of time to repay the loan, typically 24 to 84 months. While a longer term can result in lower monthly payments, it generally leads to paying significantly more interest over the loan’s life. For example, a 72-month loan might have lower monthly payments than a 48-month loan, but the total interest paid will be substantially higher.

The principal amount is the initial sum of money borrowed, excluding interest. Your monthly payments will go towards both this principal and the accrued interest.

Various fees may also be part of a car loan agreement. Common fees include:

• Origination fees, which cover the cost of processing the loan and may range from 0.5% to 2% of the loan amount.
• Application fees, credit report fees, and appraisal fees, typically ranging from $10 to $100.
• State-mandated title and registration fees, which are a necessary part of vehicle ownership.
• Late payment fees if installments are missed.
• Prepayment penalties if the loan is paid off earlier than scheduled.