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Lenders make auto loans for bad-credit borrowers all the time.
About 1 in 6 auto loan borrowers in 2021 had credit scores below 600, according to credit reporting company Experian. But borrowers with low credit scores pay a lot more. For example, on a $30,000, 60-month new-car loan, the difference in payments between borrowers in the highest and lowest credit tiers would be nearly $9,000 over the life of the loan.
Average APR, new car
Average APR, used car
Deep subprime: 300-500
Source: Experian Information Solutions
If your credit history is thin or has some negative marks, take time to correct what you can. But that’s not always an option if your car has been totaled or stolen or conked out. You may be faced with buying a car using the best loan you can find at the time.
That doesn’t mean you have to accept the first offer you get at the dealership. Here’s how to get an auto loan if you have bad credit.
Check your credit
Review your credit report and credit scores; they’re available free through NerdWallet, your bank or other personal finance websites.
Many lenders rely on automotive-specific credit scores that weigh past auto payment history more heavily. Those, like most credit scores, are calculated from the information in your Experian, Equifax and TransUnion credit reports.
While you can purchase those niche credit scores, your basic credit report and a free score give you a place to start.
Look for errors you can correct.
Identify negative items such as delinquent accounts and late payments.
Note your credit utilization and average age of accounts.
Each of those factors may affect whether you are offered a loan and at what rate.
Apply for a loan
Start by applying for auto loans with your local credit union, bank or an online lender. Look for auto lenders that use a “soft” credit check. A soft credit check uses some basic personal details to give you an expected interest rate. It isn’t a preapproval, and it doesn’t count as a hard credit inquiry that would affect your credit report.
Those rate estimates should give you a baseline of where you stand.
If you see a rate that gives you a monthly payment you can live with, you can submit a full application — and undergo a hard credit check that might temporarily knock a few points from your credit scores — to get a preapproved car loan you can take shopping.
A preapproved car loan is an advantage in two ways: First, you can negotiate with confidence, and second, it gives the dealership’s finance office a target to match or beat. They likely will make you a better offer — but only if they know they have competition.
Answer requests for additional information
Approvals are based on more than credit scores. Applications can be rejected for a wide variety of reasons:
A short credit history or no previous auto loan.
No regular source of income to make payments.
Your inability to document your income.
Not enough income to support payments.
Not enough time on the job.
A large amount of other debts.
The loan amount is too big or too small.
The vehicle does not fit the lender’s guidelines.
Software makes most decisions on approvals — that is how lenders can deliver a response in minutes — but edge cases may go to a loan analyst for further investigation.
You’ll likely be asked more questions about your payment history and ability to make the new payment, and the terms of the deal may be revised to reduce the lender’s risk.
Payment history: Be prepared to explain the circumstances of any periods of late payments, especially on auto loans, and a reason it is unlikely to happen again.
Ability to pay: Lenders will look at debt-to-income ratio (your monthly debt obligations divided by your gross pay) and payment ratio (the proposed car payment divided by your gross pay). You’ll have trouble finding a loan if your DTI is much above 40% or if your payment ratio approaches 20%. You may have to show that you have less debt than your credit reports suggest, document more income or use a co-signer.
The deal: You may have to make changes to the loan terms because the math doesn’t work for the lender. That could mean a larger down payment, for example, shortening the loan term or getting the dealer to bump up the offer on your trade-in.
If you are declined for credit, the lender will send you an adverse action notice detailing the grounds for denial. The denial itself is not reported on your credit reports and does not affect your scores.
Stay vigilant at the dealership
After negotiations, you’ll enter the dealer’s financing office.
If you have a preapproved loan: The finance officer will ask that you fill out a credit application so they can try to match or beat the terms. If they offer a better deal, review the terms to make sure the number of months and down payment are the same and choose the better loan.
The finance manager also will offer you a series of additional products and insurance, such as an extended warranty, wheel and tire insurance, anti-theft programs and gap insurance. These can greatly increase the cost of your loan. In a very competitive buying market, the dealer may make these a condition of sale, but you may be able to opt out.
If you did not bring a preapproved loan, you’ll rely on the dealer’s finance manager. After you fill out a credit application, the finance officer consults a term sheet to find which of his lending partners is most likely to approve your loan.
You may get a decision in minutes, or a request from the lender for more information or changes to the loan itself.
However, you may not get an approval right away, especially on nights or weekends. A dealer may choose to do a “spot delivery,” where you sign a loan agreement using the finance manager’s best estimate of lender and terms — based on the hundreds of deals the dealer does monthly — and take the car home. Spot deliveries are common.
But you may later get a call telling you the finance manager could not arrange a loan at the terms outlined in your signed contract. You may have been approved at a higher rate or a different term. You can return to the dealership and sign new paperwork, or you can return the car and walk away.
Consider refinancing as soon as possible
If the result is a payment you will have to stretch to afford — use an auto loan calculator to see how rate changes your monthly payments — your best option may be to buy a less expensive vehicle. You might also delay the purchase, using that time to save more for a down payment and improve your credit history.
But you may have to buy now, and the best rate you can get today may be higher than you expected.
Auto loans, like home loans, can be refinanced to a lower interest rate. Auto loan refinancing may allow you to reduce payments or shorten your loan, especially if you’ve made a number of on-time payments.
If you took extra coverage in the dealer’s office, such as an extended warranty, you may be able to cancel them. In most cases the refund is deducted from your loan balance, so your payment would not change.