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5 Tips for Financing a Car With Bad Credit

Financing a car with bad credit can be difficult but not necessarily impossible. The credit experts at Experian report that as a percentage of all car loans at the end of 2021, loans to higher-risk borrowers continued to decrease. These are for categories Experian labels Subprime and Deep Subprime. That is, borrowers with credit scores of 501 or lower; Deep Subprime is below 300.

Borrowers in the Subprime and Deep Subprime categories often have a significant ding to their credit sometime in the recent past. Loans sent to collection, bankruptcy, or the repossession of a home or car can throw a borrower into one of those lower credit-score categories.

The good news is that financing a car isn’t only available to those with gold-plated credit. Lenders issued fewer car loans to those with weaker credit in 2021 than the previous year. However, those two categories of borrowers still secured nearly 17% of all new car loans in the final quarter of 2021. They got more than 23% of all used car loans in that same period.

Borrowers in Experian’s Near Prime category are doing even better. These are borrowers with a credit score between 601 and 660. They snagged close to 19% of all new car loans by the end of 2021. That portion was less than 17.5% in 2020.

Here’s the reality of getting a car loan: Lenders earn their money by making loans. They not only want to finance cars, but they must finance cars to survive. Your goal is to find the lender that wants to finance your next vehicle by making yourself appear as low risk as possible. Here are the five keys to doing just that:

1) How to Obtain My Credit Score?

Your credit score is a snapshot of your creditworthiness at any given moment. It can change from week to week or month to month. If you haven’t checked it in the past six months, do so before shopping for an auto loan. It’s the first piece of information a lender considers. It serves as the best initial tool a lender uses to determine your credit status and the interest rate you qualify for. There are several legitimate online sources for obtaining your score, such as Experian’s Free Credit Score. Credit Karma and provide free credit scores and credit reports they update daily — all you need to do is register.

2) How to Obtain My Credit Report?

While a credit score is a snapshot of your current credit health, a credit report provides your credit history, including previous and active loans and whether you pay on time. It will also show any loans that have gone into collection, bankruptcy, and repossessions. Three major credit information agencies — Experian, TransUnion, and Equifax — collect information from lenders to build your report, which they supply to lenders upon request. You need to be aware of what is in your report before a potential lender sees it. You have a right to one free report per year from each agency. Order your report and use it as a roadmap to repair any negative information.

3) How Do I Raise My Credit Score and Report?

Never take for granted that lenders have provided the three credit-reporting agencies with accurate information. They do make mistakes. Each agency has its own established procedures for disputing misinformation. If you find an error on your credit report, make a formal dispute with the reporting credit agency yourself. You must do this with each agency where the misinformation appears. They don’t talk to one another.

Take the time to do whatever you can to clean up any legitimate negative marks on your report. Pay off balances in collection, and pay all accounts to make them current.

4) How Important Is a Down Payment?

Anyone under financial stress will probably struggle to scrape together a decent down payment. However, the more “skin” you have in the deal, the more likely a lender will take a chance on you. A hefty down payment may even motivate the lender to charge a lower interest rate. Lending is all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you will default on the loan. Whether it’s a home mortgage or a car loan, lenders view 20% as a reasonable down payment. The better your credit, the better your chance of putting up a smaller down payment. However, if your credit is really weak, putting down more will help convince a lender you are serious about your finances. It will further improve your chances.

5) Where Can I Get a Car Loan?

No matter how weak you believe your credit is, it might be better than you think. Before ever setting foot on a dealer’s lot, you should approach various lenders to get pre-approved for a loan. Remember that finance companies are probably your best shot at securing a subprime loan. However, banks and credit unions are beginning to look more favorably on borrowers with less-than-sterling credit. Don’t rule them out in your search.

Even the lending divisions of some carmakers, such as GM Financial, are open to financing a car for those with weaker credit. You will have to apply with these carmaker-owned finance companies at the dealership. Still, shop around beforehand to have a ballpark idea of the interest rate you can expect because it plays a part in how much you can afford on a car.

Your last resort may be a “buy here pay here” (BHPH) dealer. If you find yourself needing to finance through a tote-your-note dealer, take a little time and find one that works with one of the credit bureaus. You will be paying a much higher interest rate than with a conventional lender. So, you might as well ensure that you get credit for your on-time payments. It will make securing your next car loan easier and may earn you a lower interest rate next time. If you search buy here pay here options enough, you may find a franchise car dealer making BHPH deals on used cars.

Read Related Car Buying Stories:

Editor’s Note: This article has been updated for accuracy since it was originally published.


Can I get a car loan with bad credit?

Some lenders may be willing to give you an auto loan if your credit is bad. However, the loan will come with a higher interest rate and you might be required to make a large down payment.

Can I lease a car with bad credit?

You might be able to lease a car if you have bad credit. However, you will likely be required to give more money upfront and pay a higher interest rate than car shoppers with better credit scores.

How much down payment do I need for a car loan with bad credit?

Generally speaking, a 20% down payment is customary for an auto loan. Typically, lenders require higher down payments from borrowers with lower credit scores. Putting more cash down lowers the amount of money you’re financing, which lowers monthly payments.

Russ Heaps
Russ Heaps
Russ Heaps is an author specializing in automotive, financial and travel news. For nearly 35 years he has covered the automotive industry for newspapers, magazines and internet websites. His resume includes The Palm Beach Post, Miami Herald, The Washington Times and numerous other daily newspapers through syndication. He edited Auto World magazine, and helped create and edit NOPI Street... Read More about Russ Heaps

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  1. This is some good information that I have not taken serious, but I learn my lesson the hard way. Thanks and I will pass your information on to family and friends.

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