How to get a Car Loan with Bad Credit

Someone learning how to get a car loan with bad credit

Finding and purchasing a vehicle can be intimidating and even nerve-wracking. However, the intimidation factor can increase exponentially if you have bad credit. Here's why — most banks, credit unions, and auto finance institutions are set up to serve the needs of customers with good to great credit scores.

If your credit score falls in the subprime range, or below, getting approved for a car loan can seem almost impossible. Fortunately, it's not. Let's take a closer look at what you can do to improve your chances of being approved for an auto loan with bad credit.

Can You Get a Car Loan with Bad Credit?

Yes, you can get a car loan with bad credit. In fact, there are several bad credit auto loans available to help. While your credit score may not qualify you for a traditional auto loan, some lenders specialize in offering personal loans and auto loans to those with less-than-perfect credit.

Here Are Some Things to Help You

Being declined for an auto loan can be embarrassing and disheartening. Nonetheless, it's not the end of the world. We've outlined a few simple and actionable steps you can take to potentially improve your chances of being approved for an auto loan, even if you have bad credit.

Determine What's Affordable

Before you start searching for vehicles

One of the first steps to getting a car loan with bad credit starts involves the creation of a budget. While everyone's situation is different, a generally accepted rule of thumb is to spend no more than 20% of your monthly take-home pay on an automobile. Based on this rule, if you take home $3,000 a month, your total monthly automotive expenses shouldn't be over $600.

Consider All Automotive Costs

When determining what's affordable, make sure to consider all automotive costs, including:

  • Insurance costs
  • Fuel costs
  • Maintenance and repair costs
  • Because your insurance rate can range based on your driving record and the type of vehicle, it's best to get a quote for insurance before finalizing any car deal.

    Once you have done the math, you should be left with a clearer picture of how much you can afford in a monthly payment. This is extremely important when it comes to getting a car loan with bad credit because lenders will consider your ability to pay the monthly car note when determining your creditworthiness.

    Save Up for a Down Payment

    If you have less-than-perfect credit or bad credit, a down payment may be required to get a car loan. Whether mandatory or optional, a down payment is the perfect way to show lenders you have some "skin in the game" and are serious about your purchase. A good rule of thumb is to put down 20% of the purchase price of the vehicle.

    A Down Payment Offers Several Benefits

    In addition to showing the lenders you're serious about the purchase, a down payment does several things that work in your favor:

  • Lowers the amount you will have to pay in total and reduces your potential monthly payment.
  • Improves acceptance rate. If you have bad credit, the lower the amount you ask a lender to loan, the more likely your chances of being approved.
  • Prevents the vehicle from being upside down. Being upside down is when you owe more than the vehicle is worth.
  • Can potentially reduce your interest rate. Many lenders will offer you a substantially lower interest rate when you have a down payment. It shows lenders that you know how to handle money and are less of a risk.
  • Show You Can Afford Loan Payments

    When you have bad credit, your ability to make monthly payments on a car loan is imperative. However, earning a certain income and being able to prove this income to a lender are two different things. Your ability to afford loan payments can be evaluated based on a combination of different criteria, including:

  • Debt-to-income ratio. Your debt-to-income (DTI) ratio ratio is a measure used to compare your monthly debt payments to your income. Most lenders use what is called a back-end DTI that takes all of your monthly debt payments into consideration. In either case, the lower your DTI the better.
  • Recent payment history. If you have bad credit and have been making on-time payments on a debt that reports to the credit bureaus, it can work as a positive in your favor. It can help demonstrate that making on-time payments is a priority and that you are attempting to turn over a new financial leaf.
  • Compare Lenders

    Just because you are rebuilding your credit doesn't mean you should jump on the first approval you get. On the contrary, you should carefully and strategically compare offers from different lenders. Pay special attention to the following criteria:

  • Interest rate. Each lender has different approval criteria and may analyze the risk differently. This variance can render very different interest rates per lender. Make sure you compare interest rates. Besides, it never hurts to have a second opinion.
  • Early payment or prepayment penalty. Some lenders will charge what's called an early payment penalty if you pay the loan off early, while other lenders don't. Make sure to ask if the lender has an early payment penalty clause; and if you have a choice, no early payment penalty is the best solution.
  • Length of car loan or term. Longer car loans will typically have a lower monthly payment but will cost you more over the life of the loan. In contrast, shorter auto loan terms will typically have higher monthly payments and cost you less over the life of the loan. Make sure you analyze each lender's terms and make the best decision for your unique situation.
  • Credit bureau reporting. Some dealers may offer Buy-Here-Pay-Here or in-house financing. With these types of loans, the loan is issued by the dealership, and the payments you make go directly to the dealership, which is why it's called in-house financing. While this may be a reality for some, these types of auto loan arrangements usually do not report to the major credit bureaus. This means making on-time payments on the auto loan may do nothing in the realm of improving your credit. Make sure you ask and understand whether the car loan for bad credit reports to the credit bureaus.
  • Conditional approval criteria. Many lenders will issue a "conditional approval" for bad credit auto loans. As the name suggests, your auto loan will be approved — as long as certain conditions are met. Make sure you understand all of the conditions of each lender — if applicable — and select the lender with the conditions that are best suited for you and your needs.
  • Tips for Getting a Car Loan with Bad Credit

    Once you've checked all of the aforementioned boxes, it's time to begin the actual car-shopping process. And the car buying process can be slightly different if you have bad credit. Here are some actionable steps you can take to maximize your chances of being approved for an auto loan with bad credit.

    Choose an Affordable Car

    Few things can get your auto loan application declined faster than choosing the wrong vehicle. Consider this: when you are applying for a car loan, you are asking a lender to loan you a substantial amount of money. Their decision to approve or deny your loan is based on your credit history and ability to repay the loan.

    As the vehicle's price increases, the amount of risk the lender is required to take on follows suit. And at some point, it becomes too risky. On the contrary, a more affordable vehicle requires the lender to assume less risk. It can also communicate positive things about your responsibility. Simply put, it's vital to choose a vehicle that is affordable based on your financial profile. If in doubt, always consider the rule of thumb that suggests your car payments should be no more than 20% of your take-home pay.

    Have a Cosigner

    If you have bad credit, one of the best ways to improve your chances for approval is with a well-qualified cosigner. A cosigner is someone (usually a parent, spouse, or family member) with a good credit score who is willing to vouch for your credibility. To do so, the cosigner also applies for the auto loan in addition to your profile as a co-borrower.

    Together, your financial profile and your cosigner's financial profile are considered and reviewed for creditworthiness. In the end, the cosigner agrees to make the monthly payments on the auto loan in the event you default. Asking someone to cosign your loan is a big deal. It's even more significant for the cosigner because if you fail to make your car loan payments on time, it can have devastating effects on your cosigner's credit.

    Increase Down Payment

    When it comes to how to get a loan with bad credit, your down payment can make or break the loan. Simply put, the higher the down payment, the better your chances are of approval. Here's why: a larger down payment drastically reduces the risk the lender is required to assume while lowering the overall amount you have to finance. A large down payment also shows the lender that you are serious about paying for the loan. And this greater financial commitment on your end will make you a more attractive and less risky borrower.

    Need a Loan?

    We get it, finding a loan with bad credit can be tough. But Integra Credit might be able to help. Contact us or apply today.


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