Find the Best Car Loans for Bad Credit | Eligible Requirements and Application Process

Filed in Loan by on November 16, 2020 0 Comments

This page covers all the important information on finding the best car loans for bad credit. Here you will learn what bad credit loans are, the different types of bad credit loans, how bad credit loans work, where to get car loans for bad credit, how to choose the best car loans for bad credit, best car loan rates for bad credit, bad credit loans application requirements and all other important bad credit loans information you may need. Stay tuned.

What Is Bad Credit?

Bad credit refers to a person’s history of being unable to pay bills on time and the likelihood that they will not be able to make payments on time in the future. This is often reflected in a low credit score. Companies can also have a bad credit history depending on their payment history and current financial situation.

A person (or business) with bad credit will find it difficult to borrow money, especially at competitive interest rates, as they are considered to be riskier than other borrowers. This is true of all types of loans including secured and unsecured varieties although there are options available for the latter.

What Is a Bad Credit Loan?

A bad credit loan is a financial solution for consumers who need help paying their bills, but who have an unattractive credit score and poor credit history. It’s a choice that is left to you when a few missed payments or overspending on your credit cards have weakened your credit score and left you with multiple financial aid options.

Bad credit loans work in exactly the same way a personal loan does. Its money you borrow and pay back in fixed monthly installments, usually over the course of one year, but it could go three years. The loan can be used for just about anything, including consolidating credit card debt, paying off medical bills, buying a car or even making a major repair to your own car. 

Types of Bad Credit Loans?

There are two main options when it comes to getting a loan if you have bad credit: secured and unsecured personal loans

1. Secured Personal Loans

This type of personal loan requires some type of collateral. If you get a loan from your bank, you might secure a personal loan with your home, car, or some other assets. Generally, they offer more favorable rates and terms and higher loan limits, since you have greater incentive to pay back your loan in a timely manner. And if you have bad credit, it may be easier to get a secured loan than an unsecured one.

If you default on the loan, however, you risk losing your home, car or other collateral. The most common types of secured loans are mortgages, home equity loans and auto loans, although some lenders offer secured personal loans.

2. Unsecured Personal Loans

Unsecured loans don’t require any collateral, and the rate you receive is based on your creditworthiness — meaning they may be harder to qualify for if you have below-average credit. Since it’s not secured by an asset, this type of loan typically comes with a higher interest rate and lower loan limits, but you don’t risk losing your assets if you fall behind on payments.

However, there are many lenders willing to provide unsecured personal loans at reasonable rates. Carefully consider which type is likely to best fit your needs.

What Is Considered a Bad Credit Score?

Credit scores range from 300 to 850 and while there is no official start in the ‘bad credit’ category, it is safe to say that if you are under 650 you are considered as a high risk and pay the highest interest rates. People in this category are prime candidates for bad credit loans.

The definition of “good” and “bad” credit score varies from lender to lender. Some will not touch anyone with a credit score below 650, some actually market to consumers with a sub-650 score. So it’s hard to tell what makes you “good” or “bad” on the credit scoreboard, but the acceptable range is something like this:

  • 760-850 – Excellent
  • 700-759 – Very good
  • 660-699 – Fair
  • 620-659 – Poor
  • Scores under 620 – Extremely poor

How Bad Credit Scores Affect Borrowing

Consumers in the good to excellent credit score category (700 and above) enjoy the lowest interest rates and the best loan terms. Consumers in the poor and extremely poor categories (anything below 620) are burdened with high rates and may not be approved for a loan at all. People in the middle (621-699) must weigh the cost of bad credit against the gain they hope to make by using it to pay their bills.

In other words, the higher your credit score, the more likely you’ll get a good deal on a loan. Low credit scores are risky business and borrowers are punished for it with high interest rates.

How to Get a Car Loan with Bad Credit?

If you have a bad credit history, getting a car loan can be difficult, but possible. The most important aspect of getting a car loan with a bad credit is researching your options to find the loan that will best serve you, regardless of your credit score. Here are 10 things you should know before starting the process of applying for a car loan with a bad credit.

1. Know your Credit Score

Before you begin the shopping process, check your credit score. According to the FICO credit scoring system, which ranges from 300 to 850, any score that falls at or below 580 is considered poor.

Your FICO score consists of a few categories, like how much you owe, the length of your credit history and your payment history. Not making your payments on time, consistently spending more than your available monthly credit and having a short credit history can all negatively impact your credit score.

There may be factors you’re able to address immediately, like making payments on delinquent accounts. Before applying for an auto loan, you should also avoid opening new credit cards or loans. Taking action to repair your credit score before you begin shopping can put you in a more favorable position with lenders.

2. Have a Source of Income

Having a steady income is important to auto lenders because it improves the likelihood that you’ll make your monthly payments. Depending on the lender and your job situation, you may need to provide one or more forms of documentation.

If you’re a W-2 employee, for instance, a recent pay stub or a W-2 form may suffice. If you’re self-employed or receive Social Security or other similar forms of income, however, you may need to provide bank statements.

Speak with the lender early on in the process to talk about your situation and find out what documents you need to avoid prolonging the process.

3. Be Able to Prove Your Identity and Residence

If you’re getting a loan from the bank or credit union you use regularly, you may not need to provide this information. If you’re working with a lender for the first time, however, you may need to provide a government-issued ID and proof of residence.

This is primarily because the lender wants to know where the car will be parked in case you default on payments and it needs to repossess the vehicle.

Again, requirements can vary by lender, but in general, a driver’s license or other government-issued ID with your current address can satisfy both. If you don’t have that, you can also provide a utility bill, lease agreement or bank statement with your address on it to prove your residence.

4. Save for a Down Payment

If you have a lower credit score, making a down payment on a car can increase your chances of securing and getting approved for an auto loan.

Setting aside some extra cash each month for a down payment can also offset higher interest rates caused by a less-than-stellar credit score and can lower your loan-to-value ratio, helping you qualify for better terms.

5. Research

Prepare as much as possible so that you are not caught off guard when the time comes to negotiate. Before applying for a loan, know exactly how much monthly loan payment you can afford and what annual interest rates are common among auto lenders. With bad credit, you are likely to be offered some of the highest rates. If you are buying a used car, it will also help you find out the Kelley Blue Book value of your preferred car.

6. Shop around

Once you’ve started the shopping process, don’t limit yourself to just one lender. There are a variety of lenders who can help you get a loan, including:

  • Banks and Credit Unions: If you already have a relationship with your bank or credit union, start here. Some banks and credit unions offer discounted rates for members.
  • Online Lenders: Many online lenders offer a prequalification tool on their websites that allows you to see if you’ll qualify for the loan before applying, which can save you a hard credit check if you don’t meet the requirements.
  • Car Dealerships: You can finance your car through a dealership if you meet the financial and credit criteria. You’ll meet with a representative of the finance department, and they’ll send your information to different lenders to provide you with a competitive rate. Some dealerships may also offer programs for borrowers with a bad credit history.
  • Buy-here, Pay-here Dealerships: Buy-here, pay-here dealerships can be useful if you don’t get approved by a bank or lender for a loan, but they should be approached with caution. While these types of dealerships may be more likely to approve someone with bad credit for a loan, the interest rates can be much higher. Make sure you research the rates and conditions before applying for a loan at one of these lots.

7. Prequalify with Lenders

Prequalification allows you to see if you’ll qualify for a loan before you apply. With prequalification, you’ll save time in applications and avoid unnecessary hard credit checks. Multiple hard credit checks have a negative impact on your credit score, and if you already have less-than- desirable credit, it’s always worth prequalifying with a few lenders to compare the rates and terms you qualify for.

8. Avoid Subprime Lenders

Subprime lenders can seem like a sure bet to anyone wondering how to get a car loan with bad credit. These lenders usually cater to customers with lower credit scores and can make the car buying process seem easy and stress-free at first.

Subprime car loans can come with very high interest rates and are unlikely to help you improve your credit score. Always do your research ahead of time and only consider subprime lenders if you cannot find another financing option.

9. Consider Loan Terms

Lower monthly payments look good on paper and are usually used to entice buyers. In reality, they may lead to you paying more for your car over the life of the loan, since they’ll come with longer terms. Because car loans for bad credit have higher APRs, you may end up paying more than the car’s full value by the end of the loan because of interest accumulation.

When you’re shopping, look for the most favorable terms usually the lowest APR over the shortest period of time. That way, you’ll have more manageable monthly payments with reasonable interest rates. If you’re unable to find a low APR, you may want to consider shopping for a different vehicle.

10. Consider a Co-Signer

Ask a friend or a relative to go with you, says Massachusetts-based consumer attorney Yvonne Rosmarin. Bringing someone you trust to the negotiating table can help inspire confidence. And confidence, combined with know-how, can lead to more favorable loan terms.

If this is someone that you really trust, consider asking them to be a co-signer. Co-signers reduce much of the risk for lenders — they’ll become responsible for the loan should you default on your payments. Adding a co-signer can be a strong negotiating tool and usually results in a lower interest rate.

Be absolutely sure you can make payments before taking on a co-signer. If you fail to make payments and the debt falls on them, it can permanently damage your personal relationship.

11. Watch out for Loan Scams

Nonprime buyers are more likely to encounter lending contracts with nonessential goods and services, says Josh Frank, former senior researcher for the Center for Responsible Lending. Other costs, such as car insurance rates, can pile up for nonprime buyers.

Never allow the loan to be contingent on purchasing any add-on, such as extended warranties, after-market services and even car insurance. Be aware of these add-ons, especially if you need to apply at a buy-here, pay-here dealership or you’re planning on trading in your vehicle.

12. Improve Your Credit before Applying

Unfortunately, if you have poor credit, it may be more difficult for you to get a car loan. You may face less favorable conditions or even predatory lending practices. The better your credit situation, the higher your chances of getting approved for a car loan with excellent terms. If you don’t need a new car quite yet, check your credit score to see where you stand, then focus on areas where you can improve.

As discussed earlier, there may be factors you’re able to address immediately, like making payments on delinquent accounts. Before applying for a car loan, you should also avoid opening new credit cards or loans. Taking action to repair your credit score before you begin shopping can put you in a more favorable position with lenders.

How to Pick the Right Lender for your Car Loans for Bad Credit?

Choosing the right lender for your bad credit loans is an important decision. Even though your options may be limited, you’ll want to shop around and compare lenders to see who will offer you the best rates and terms.

The lender you choose should help you feel comfortable and knowledgeable about the bad credit loans process. You should look for a lender who will tell you in advance about the entire process of obtaining a loan, especially the requirements for obtaining a loan.

Clarity and visibility are necessary requirements for any financial partner. You should receive documentation on the requirements, rates and costs associated with your loan.

When you’re in financial distress, you can easily be tempted by companies that promise an easy way out. There is no easy way out. If you come across any of these loan fiddles, politely turn your back on the lender and run!

  1. Companies that ask for fees upfront. They might call them “application fees” or “document fees” but they’re essentially asking to get paid before they do anything. Very bad sign.
  2. Companies that request personal information, including social security number, bank account number or credit card without first providing you a loan agreement in writing.
  3. Companies that request a wire transfer of money. Verify the company’s address and maybe even check with the state attorney’s office in that city to see if there have been any complaints.
  4. Companies with no state registration. If they’re lending money, they’re required to register with the state. Ask to see the registration and the verify it.
  5. Website reviews. You should be suspicious if every single review gives five stars and says wonderful things. That doesn’t mean it can’t happen, it just means you need to verify that the reviews are authentic before believing everything you see or hear.

Best Car Loans for Bad Credit

Below, are seven lenders and companies offering some of the best car loan rates. In order to compile this list, we looked at auto loan products from lenders and compared key factors including APRs, minimum loan amounts, repayment terms, credit score requirements, and other perks.

Company NameBest ForMin. Credit ScoreEstimated APRMin. Loan AmountMax Loan AmountTerm Length
PenFed Credit UnionOverallNot disclosedAs low as 1.39%$500$100,00036 to 84 months
Bank of AmericaAuto LoansNot disclosed As low as 2.59%$7,500 ($8,000 for Minn.)Not disclosed12 to 75 months
Consumers Credit UnionCredit UnionNot disclosedAs low as 2.69%NoneNone0 to 84 months
MyAutoLoanBad Credit575As low as 2.49%$8,000 ($5,000 for refinance)Not disclosed0 to 84 months
AutoPayRefinanceNot disclosedAs low as 1.99%$2,500$100,00024 to 84 months
LightstreamOnlineNot disclosedAs low as 2.49% $5,000$100,00024 to 84 months
CarvanaFair CreditNoneAs low as 3.9%NoneNot disclosed36 to 72 months

Frequently Asked Questions about Auto Loans

Who Has the Best Rates for Car Loans?

The company that is able to offer you the lowest rates for an auto loan can vary depending on where you live, your credit score, your employment history and other factors. Your best bet is shopping around among at least three auto lenders until you find the best deal.

Is a 72-month Car Loan a Bad Idea?

One problem with longer car loans is the fact that you often wind up “underwater” on your loan for the first few years. This is due to the fact that cars tend to depreciate faster than you can pay your loan off.

A 72-month car loan means you’re paying your loan off more slowly and have the potential to owe more than your car is worth for the first few years. However, longer car loans let you secure a more affordable monthly payment, which is likely an important consideration for your budget.

What are Used Car Loan Interest Rates?

Used car interest rates range from 4.08 percent to 20.67 percent for most borrowers, according to the most recent statistics from Experian. Rates for used cars tend to be higher than those offered for new car purchases.

What Credit Score Do you Need to Get 0% financing on a Car?

Superprime borrowers with credit scores above 781 are most likely to qualify for 0 percent APR offers that sometimes come with a new car. However, you may be able to qualify if you’re a prime borrower with a score between 661 and 780.

How do you Get Pre-qualified for an Auto Loan?

You can get prequalified for an auto loan online and without ever leaving your home. All you have to do is select one of the lenders on this list and choose its online option to “get prequalified” or “apply for a loan.” Many lenders let you get prequalified for an auto loan without a hard inquiry on your credit report.

How do I Refinance my Car Loan?

Refinancing a car loan is essentially just taking out a new car loan — so the steps for applying are mostly the same. You’ll need your driver’s license, Social Security number and proof of income, as well as details about your car. If approved, you’ll use the funds from your new loan to pay off your old car loan, then begin making monthly payments with your new interest rate and terms.

Can I Sell my Car with a Loan?

It is possible to sell your car with an outstanding loan, but you may have to go through a few extra steps. If your car is worth less than what you currently owe on the loan, you have what’s known as negative equity — meaning you may need to pay the difference out of pocket or refinance the remaining amount with a different type of loan.

If your car is worth more than what you currently owe, on the other hand, you may be able to pocket the difference in cash when you sell the car. Whatever your situation, reach out to your lender about your options, as each lender sets different rules for selling a car with a loan.

Should I Get an Auto Loan from the Dealership or the Bank?

Choosing between a dealership and a bank for an auto loan is complicated. In general, dealerships may offer higher rates than banks — but this may not be the case for used cars. Regardless, it’s important to get quotes from a few banks or online lenders first; that way you can come to the dealership prepared. Ask for a quote from the dealership as well, comparing rates, terms and any additional fees.

Do I Need to Make a Down Payment or Provide a Trade-in when Buying a Car?

Many lenders require some form of down payment on a car. However, that’s not necessarily a bad thing; making a down payment will lower your monthly payments — and the larger your down payment, the more you save. Making a larger down payment could also lower the interest rate the lender offers you.

Getting a car loan with bad credit may seem like impossible, but it is not. People with poor credit are approved for auto loans all the time, and while it may seem difficult, there are some steps you can take above to increase your chances of getting the loan and the car you need.

We hope you will find this information useful. Do you have any queries on Best Car Loans for Bad Credit? Please feel free to let us know so we can assist you with any information you will need.

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