Illustrations by Clint Branch/Bankrate
A bad credit auto loan is a type of car financing that deals with borrowers with low credit scores. These loans generally come with higher borrowing rates. This can lead to headaches if you don’t dig into the details before accepting them.
That being said, understanding how to compare your options can help you Get the best rate For your financial situation. Furthermore, knowing what kind of dealerships to avoid can help you avoid common traps and save money.
What is a bad credit auto loan?
Like other car loans, car loans for bad credits are repaid in equal installments each month over a set period. Once fully paid, the vehicle is yours.
When you apply, Bad credit lender Consider your credit score, income, and current debt. If you already have a car in mind, lenders can also consider the manufacturer, model, age and condition of the vehicle you are interested in. Based on this information, the lender will determine your interest rate and the maximum amount that you have approved to borrow.
However, you can expect higher interest rates. On average, poorly credited borrowers qualify for double-digit fees. In many cases, more than 13% for new cars and more than 19% for used cars. This is because lenders view lower credit scores as a more indication of risk.
Types of lenders offering car loans for poor credit
There are three main types Lenders who offer bad credit loans:
- Banks and Credit Unions: If you have an active relationship with your financial institution, you can qualify for the loan on potentially reasonable terms. Still, your minimum credit score can be higher compared to online lenders.
- Online lenders: With most online lenders, you can prequalify for fundraising in minutes without affecting your credit score. However, if you don’t get face-to-face support and use an online comparison platform, you may not be familiar with the matching lender.
- dealer: Dealers provide a one-stop shop for borrowers. You can process purchases and financing at once, and some dealers can offer loans regardless of your credit score. The main drawback is that you will probably face a higher rate.
How much can I borrow from a defective credit auto loan?
A low credit score may reduce the amount you can borrow. For borrowers in the subprime category, the average amount loaned on a used car is just over $22,000. Data from Experian.
Lenders often view borrowers with lower credit scores as riskier, and are less likely to approve large loans. Save for A considerable down payment Both can close the funding gap and make lenders more attractive.
If you need a high-end vehicle but don’t get the full price approved, check out the old model year. purchase Certified China It eliminates some of the risks of purchasing used, but it can be difficult to qualify.
Do you get a car with poor credit? Follow these tips
Before you start the search, do the calculations How many cars can you buy? And be honest with yourself about your budget. Shop for a used car as it’s unlikely that you’ll qualify for a new car at reasonable interest rates. And most importantly, compare at least three lenders to find the most competitive rate in your financial situation.
1. Prepare for higher interest rates
Best car loan fees Reserved for borrowers with excellent credit scores. If you have a credit score in the 500s, you will face much higher fees. If you can refrain from purchasing a car, it may be better to work on improving your credits to qualify for a lower interest rate.
In the fourth quarter of 2024, according to the latest Experian data, those with a credit score of 300-500 Average interest rate 15.75% of when purchasing a new car. Those with a credit score of 501-600 averaged 13.08%.
Rates per credit score collapsed as follows:
|
Credit score |
Average interest rates for new cars |
Average interest rates for used cars |
|
Super Prime (781-850) |
4.77% |
7.67% |
|
Prime (661-780) |
6.40% |
9.95% |
|
Non-Prime (601-660) |
9.59% |
14.46% |
|
Subprime (501-600) |
13.08% |
19.38% |
|
Deep Subprime (300-500) |
15.75% |
21.81% |
When comparing loan estimates from dealers, look beyond interest rates. Be aware of additional costs that some lenders charge on car loans, such as origination fees and advance fees.
2. Avoid buying and paying
Some dealers will refuse to sell the vehicle if there is a bad credit. These buyers are There are things I bought and paid for.” Target audience. These dealers advertise car loans and car purchases without performing credit checks.
However, these lots are rarely the best choice. Even bad credit car loans, buybacks, payer loans often hold high fees, stacking fees, and even requirements to equip GPS units for easy foreclosures. Instead, check out the online lenders that cater to bad credit buyers. Caribou or Autopay.
3. If you can help it, don’t take the longest period available
While long-term car loans allow you to get more affordable monthly payments, the trade-off is the steeper borrowing cost over the lifespan of the loan than the short-term ones. Some lenders charge higher fees for extended repayment periods due to higher risk of default.
Conclusion
Make sure to execute your number before applying for a car loan to a bad credit borrower. Make sure the benefits outweigh the costs. You might want to consider it too Leasing your car with poor creditIt may be even more difficult to qualify.
Ultimately, you can get a car loan with poor credit. Finding lenders requires you to do more legwork and budget for higher interest rates, but that’s possible. Weigh all options and shop to find the best deal before committing.
