Can You Get Car Finance With Bad Credit?
Discover how to secure car finance even with a less-than-perfect credit history. Learn strategies and understand what to expect.
It is possible to obtain car financing even with a less-than-perfect credit history. Many individuals with lower credit scores successfully secure auto loans, allowing them to purchase a vehicle. While the process may present certain considerations, various financing options exist for those seeking to navigate car ownership with bad credit.
Understanding Bad Credit and Its Impact on Car Finance
“Bad credit” refers to a credit score that indicates a higher perceived risk of default to lenders. Lenders use scoring models such as FICO or VantageScore, with scores ranging from 300 to 850 points. A score below 600 is often categorized as subprime or very poor. Lenders evaluate creditworthiness by analyzing several factors, including an applicant’s payment history, the amount of outstanding debt, and the length of their credit history.
A history of missed or late payments, high credit card balances relative to credit limits, or previous loan defaults can lower a credit score. These elements suggest a higher likelihood of future missed payments, which increases the financial risk for lenders. Because of this elevated risk, lenders may adjust their loan offerings to mitigate potential losses.
Preparing for a Car Loan Application with Bad Credit
Before submitting a car loan application, individuals should review their credit report for accuracy. This step helps in understanding their current credit standing and identifying any potential errors that could negatively affect their score. Disputing inaccuracies found on a credit report can improve one’s credit score.
Applicants will need to gather documents to support their loan request. These include proof of income and employment, such as recent pay stubs or tax returns, and proof of residence, like a utility bill or lease agreement. Lenders also require personal identification, such as a valid driver’s license, and proof of vehicle insurance.
A down payment can influence a lender’s decision, especially for those with lower credit scores. Providing a down payment reduces the loan amount needed, thereby decreasing the lender’s risk and potentially improving approval odds. A down payment of 10% or more of the vehicle’s price is recommended and can lead to more favorable loan terms.
Another consideration is a co-signer, who agrees to share legal responsibility for the loan repayment. A co-signer with a strong credit history can increase the primary borrower’s approval chances and may help secure better loan conditions.
The Car Loan Application Process
Once preparatory steps are complete, individuals can explore avenues for applying for a car loan. Options include applying directly through a dealership, which often has relationships with multiple lenders, or seeking financing from banks, credit unions, or online lenders. Some online lenders specialize in providing loans to individuals with lower credit scores.
The application process involves completing a form, either online or in person, and submitting the documentation. Lenders will then review the application, assessing the applicant’s financial situation and creditworthiness. This assessment helps them determine the terms of any potential loan offer.
After submission, applicants receive communication regarding approval, denial, or a request for additional information. If approved, the lender will present the loan terms, including the interest rate and repayment schedule. Comparing offers from multiple lenders can provide a broader perspective on available rates and terms.
Key Aspects of Bad Credit Car Loans
Car loans obtained with bad credit feature higher interest rates compared to loans for borrowers with strong credit histories. This is due to the increased risk lenders undertake when financing individuals with lower credit scores. For instance, in the first quarter of 2025, borrowers with credit scores between 300 and 500 received an average new car loan rate of 15.81%, and used car loan rates averaged 21.58%. These rates are higher than the average new car loan rate of 5.18% for those with excellent credit.
Loan terms for bad credit car loans can differ in duration. A longer loan term might result in lower monthly payments, but it means paying more in total interest over the life of the loan. Conversely, a shorter term can lead to higher monthly payments but reduces the overall interest paid.
Most car loans are secured loans, meaning the vehicle serves as collateral. If the borrower fails to make payments as agreed, the lender has the right to repossess the car. This secured nature reduces the risk for lenders, which can make it easier for them to offer financing to individuals with lower credit scores. Certain lenders, often referred to as subprime lenders, specialize in providing loans to individuals with credit scores below 600.