How to Buy a Car When Your Credit Score Is Low

What happens when you buy a car with bad credit

Buying a car with bad credit is possible, but it will cost you more. Lenders will charge you a higher interest rate because they see you as a higher risk. You may also face a larger down payment requirement, a shorter loan term, or both. Some lenders specialize in bad-credit auto loans and will work with you when traditional banks will not.

The key difference between bad-credit car buying and standard car buying is that you have fewer lenders to choose from, and the ones willing to lend will price that risk into your loan. A person with a credit score of 550 might pay 15 to 20 percent interest on a five-year loan, while someone with a score of 750 might pay 4 to 8 percent on the same loan. Over five years, that difference adds up to thousands of dollars.

You still have leverage, though. You can shop around, put down a larger down payment to lower the lender's risk, bring a co-signer, or buy a less expensive vehicle. Each of these moves can lower your interest rate.

Key Takeaways

• Bad-credit lenders charge higher interest rates but will approve loans that traditional banks reject, and rates vary widely between lenders so shopping around saves money.
• A larger down payment (15 to 25 percent of the car's price) signals lower risk to lenders and can lower your interest rate by one to three percentage points.
• Credit unions often offer better rates than buy-here-pay-here dealers or online lenders, so check your employer, union, or community credit union before going to a dealership.
• A co-signer with better credit can lower your rate, but they are legally responsible for the full loan if you stop paying.
• The total cost of the loan matters more than the monthly payment—a longer loan term means lower payments but thousands more in interest.

Where to find bad-credit auto lenders

Credit unions are usually the cheapest option. If you belong to a credit union through your employer, union membership, or community, ask whether they offer auto loans to members with lower credit scores. Credit unions typically charge 2 to 5 percentage points less than online lenders or dealership financing, and they may be more flexible about credit score requirements.

Online lenders that specialize in bad-credit loans include LendingClub, Upstart, and Elevate. These lenders pre-may have access to you without a hard credit inquiry, so you can see what rate they would offer before you formally apply. Rates are usually higher than credit unions but lower than dealership financing or buy-here-pay-here lots.

Dealership financing is available through the dealership's finance office. The dealership works with multiple lenders and can sometimes find one willing to work with your credit score. Dealership rates are often higher than online lenders, but dealerships may be more willing to negotiate on price or terms if you are buying the car from them.

Buy-here-pay-here dealers are the most expensive option. These dealers finance the car themselves and charge 18 to 29 percent interest. They also typically require a larger down payment (25 to 50 percent) and may install a GPS tracker or starter interrupt device on the car. Use this option only if no other lender will work with you.

How to lower your interest rate

A larger down payment is the single most effective way to lower your rate. Putting down 20 to 25 percent of the car's price instead of 5 to 10 percent signals to the lender that you are serious and reduces their risk if you default. This can lower your interest rate by one to three percentage points. If you have $3,000 saved, buy a $12,000 car instead of a $20,000 car—the lower purchase price matters as much as the percentage down.

A co-signer with good credit can lower your rate by two to five percentage points. The co-signer does not need to be present at the dealership, but they do need to sign the loan documents. Understand that the co-signer is legally responsible for the full loan if you miss payments. Do not ask someone to co-sign unless you are certain you can pay on time.

Shopping around between lenders takes time but saves money. Get pre-qualification offers from at least three lenders before you go to the dealership. Pre-qualification does not hurt your credit score. Once you have offers in hand, you know what rate you should expect and can negotiate with the dealership from a position of knowledge.

Buying a less expensive car lowers the lender's total risk. A $10,000 car is easier to finance than a $25,000 car, even with bad credit. The monthly payment will be lower, and the interest rate may be lower too.

What documents and information you will need

Lenders will ask for proof of income (recent pay stubs or tax returns), proof of residence (a utility bill or lease), a valid ID, and your Social Security number. They will pull your credit report themselves, so you do not need to bring it.

If you are self-employed, bring two years of tax returns and a profit-and-loss statement for the current year. If you receive disability or Social Security income, bring a benefits statement showing your monthly amount.

Have your driver's license and proof of insurance ready before you go to the dealership. You cannot drive the car off the lot without insurance, and some dealerships will not let you test-drive without proof that you are insured.

Understanding the loan terms

The interest rate is the percentage of the loan amount you pay to borrow the money. A higher rate means higher monthly payments and more total interest paid over the life of the loan. With bad credit, rates typically range from 10 to 25 percent depending on the lender and your down payment.

The loan term is how many months you have to pay back the loan. A 36-month (three-year) loan has higher monthly payments but costs less in total interest. A 72-month (six-year) loan has lower monthly payments but costs significantly more in total interest. With bad credit, lenders often push longer terms to make the monthly payment affordable, but this means you pay thousands more overall.

The down payment is the amount you pay upfront. The rest is financed. A larger down payment means a smaller loan, which means lower monthly payments and lower total interest. It also improves your chances of approval and lowers your interest rate.

Always calculate the total amount you will pay over the life of the loan, not just the monthly payment. A $15,000 car at 18 percent interest over 72 months costs about $24,000 total. The same car at 12 percent interest over 48 months costs about $18,500 total. The second loan costs $5,500 less even though the monthly payment is higher.

What to watch out for

Do not let the dealership pressure you into a longer loan term just to lower the monthly payment. The monthly payment is not the real cost—the total interest is. A salesperson will emphasize the monthly number because it sounds affordable, but you will pay far more over time.

Do not agree to add extras like extended warranties, gap insurance, or paint protection to the loan unless you understand what they cost. These add-ons are often marked up 50 to 100 percent and financed at your full interest rate, making them much more expensive than they appear.

Do not buy a car you cannot afford to maintain. With bad credit, you may be tempted to buy an older, cheaper car, but older cars cost more to repair. Budget for maintenance and repairs before you commit to a monthly payment.

Do not apply for multiple loans in a short time. Each application triggers a hard credit inquiry, which temporarily lowers your score. Space applications out by at least a week, and try to complete all your shopping within 14 to 45 days so multiple inquiries count as one inquiry for credit-scoring purposes.

Building credit while you pay off the car loan

A car loan, paid on time, will gradually improve your credit score. Each on-time payment is reported to the credit bureaus and shows lenders that you can handle debt responsibly. After 12 to 24 months of on-time payments, your score should improve enough that you can refinance the loan at a lower rate with a different lender.

Refinancing means taking out a new loan to pay off the old one. If your credit score has improved, you may may have access to for a lower interest rate. Even a two to three percentage point drop saves hundreds of dollars over the remaining loan term. Check with your credit union or online lenders after a year of on-time payments to see if refinancing makes sense.

While you are paying off the car loan, keep your credit card balances low and pay all bills on time. Do not take on new debt unless necessary. These habits will improve your score faster and make future borrowing cheaper.

Frequently Asked Questions

Can I get a car loan with a credit score below 500?

Yes, but your options are limited. Credit unions and online lenders may work with scores that low, but buy-here-pay-here dealers are more likely to approve you. Expect a higher interest rate (18 to 25 percent) and a larger down payment requirement (25 to 50 percent). A co-signer with better credit significantly improves your chances.

What is the difference between pre-qualification and pre-approval?

Pre-qualification is an estimate based on information you provide—it does not involve a hard credit inquiry and does not commit you to anything. Pre-approval involves a hard credit inquiry and a formal review of your finances, and it is a stronger signal that the lender will fund the loan. Get pre-qualifications from multiple lenders, then move to pre-approval with your top choice.

Should I buy a new car or a used car with bad credit?

Used cars are usually easier to finance with bad credit because they cost less. A lower purchase price means a smaller loan, which is less risky for the lender. New cars have better warranties and lower maintenance costs, but the higher purchase price makes them harder to finance when your credit is low. Start by looking at used cars in the $8,000 to $15,000 range.

What happens if I miss a payment on a bad-credit auto loan?

The lender will contact you and may charge a late fee. If you miss multiple payments, the lender can repossess the car. With bad credit, lenders are quicker to repossess because they have less confidence you will catch up. If you know you will miss a payment, contact the lender immediately—some will work out a modified payment plan.

Can I get out of a bad-credit auto loan if the rate is too high?

You can refinance if your credit improves, or you can sell the car and pay off the loan with the proceeds if the car is worth more than you owe. You cannot simply walk away from the loan—you are legally obligated to pay it back. If the monthly payment is unaffordable, contact the lender about a loan modification or refinancing options before you fall behind.