America is a car-loving nation—and for good reason. Unless you live in a large city with accessible public transit, getting from point A to point B is almost impossible unless you own a vehicle. For most people, cars are a necessity, not a luxury.
They’re also a major investment, which means the majority of folks need to finance a vehicle purchase. Unfortunately, going into the auto loan process with bad credit can present a number of challenges. You might struggle to get approved, and you could get stuck with high-interest rates and less than favorable loan terms.
#1. Clean Up Your Credit Before You Start Shopping
Before you hit the dealerships, know what you’re dealing with in terms of your credit score. Start by obtaining free copies of your credit reports from all three credit bureaus, then check each one carefully to find out which items are dragging down your score.
If you see errors, or you spot hard inquiries that shouldn’t be there, start the dispute process right away. See late payments or high balances? Pick one or two balances and make extra payments to help lower your credit utilization.
Ideally, you should start cleaning up your credit sooner rather than later—even six months or more before you plan to buy a car. People with higher credit scores pay lower interest rates, so working on your credit score now will almost certainly pay off by the time you’re ready to hit the road.
#2. Avoid Credit Mistakes That Will Lower Your Score
As you prepare to shop for a car, follow good credit best practices. This means paying your bills on time, keeping your credit card balances low, and avoiding any kind of liens or collection accounts.
You should also avoid taking on any new debt, such as opening a credit card or taking out another kind of loan. In short, don’t do anything that could lower your credit score.
#3. Consider The Entire Cost of Owning the Car
When you own a car, you’re responsible for a lot more than just your monthly car payment. Before you shop, factor in the various costs you can expect to pay for your new wheels. Additional expenses can include things like car insurance, fuel, tune-ups at the mechanic, and snow tires in the winter.
#4. Know What Kind of Interest Rate to Expect
Loan interest rates are an important part of the auto loan big picture. A lower interest rate will make your monthly payment lower, which can determine what kind of car you can afford. If you have bad credit, you should expect to pay more in interest.
On the other hand, be wary of interest rates that seem higher than average. People with bad credit are often targets of predatory lenders. Check out approximate interest rates online before you start your car search. You can find free auto loan calculators that give you a ballpark estimate based on your credit score.
#5. Be Smart About Timing Your Loan Applications
It’s a good idea to shop around for loans, but be cautious about applying for too many at once. When you submit a loan application, lenders pull your credit report, which counts as a “hard inquiry.” Having too many of these on your report can lower your credit score.
If you time it right, however, you can avoid racking up too many hard inquiries. Most credit scoring models count multiple auto loan inquiries made within a short timeframe (usually 30 days) as a single inquiry.
This makes sense since people applying for a few different car loans at once are likely shopping for a vehicle. If you make all of your loan applications within a narrow timeframe, you probably won’t end up with numerous hard inquiries.
#6. Consider a Shorter Term Loan
Having bad credit usually means paying a higher interest rate. You might be able to get around this by choosing an auto loan with a shorter term. For example, you’ll likely pay lower interest on a three-year loan compared to a five-year loan.
The catch is that shorter-term loans typically have higher monthly payments. Before you sign, make sure your budget can handle the extra expense.
#7. Make a Bigger Down Payment
If a bad credit score is limiting your auto loan options, you might be able to broaden your choices by putting more money down. A bigger down payment will lower the total amount of the loan, which means lower monthly payments and less interest overall.
#8. Know What You Can Afford to Pay
Before you plunk down a large down payment or finance a car with a big price tag, make sure you can truly afford it. This is where having a monthly budget can help you make an informed decision about what kind of car to buy.
It’s also important to resist the various bells and whistles that can drive up the cost of your car. While upgrades like top-of-the-line trim packages and fancy speaker systems can be tempting, they’ll also cost you.
Your car loses value the second you drive it off the lot, and it’ll depreciate about 20 percent the first year you own it. You might appreciate the upgrades now, but you won’t recoup your investment in the long run.
#9. Get Pre-Approved
If you’re struggling to find an auto loan, look into getting pre-approved for a loan through your bank or credit union. Pre-approval lets you know how much you can spend in advance, so you can more easily shop within your budget. Being pre-approved can also put you in a stronger negotiating position when it’s time to deal with car salespeople.
When you’re ready to get pre-approved, it’s usually best to start with your current bank, where you might have access to more options and better interest rates. Unlike a dealership, your bank isn’t in the business of selling cars, which means they’re not interested in pushing you into a pricier vehicle.
#10. Comparison Shop
Don’t be afraid to shop around for the best deal. Before the internet, car shopping meant taking an entire Saturday (or more) to hike from dealership lot to dealership lot, fending off pushy sales associates.
While you might not be able to avoid the car lots altogether, you can definitely go into the buying process more prepared. Start your search online to get an idea of current prices and the best deals. Look for manufacturer discounts on certain models, as well as end-of-the-year sales when dealerships are trying to clear out the previous year’s stock.
You should also comparison shop for your auto loan. If you can’t get financing through your bank, you can probably still obtain a loan through the dealership. You can also research lenders and interest rates online to narrow down your search before you’re ready to shop.
#11. Inquire about Refinancing Down the Line
If you already have a car loan, it may not be too late to get a better deal. In some cases, it’s worth checking into refinancing.
When you refinance your auto loan, you take out a new loan to pay off the old one — replacing your previous loan with one that offers more favorable terms, such as a lower interest rate. This can make your monthly payments more manageable and save you money in the long run.
People refinance their car loans for a variety of reasons. In some cases, it’s as simple as taking advantage of a lower interest rate. If rates have dropped since your last loan, even a few percentage points could make a difference in your monthly payment. You might also want to look into refinancing if your credit score has gone up considerably, as this could open the door to better interest rates.
#12. Be Careful with “Buy Here, Pay Here” Financing
You’ve probably heard car dealership commercials offering financing for those with “bad credit or no credit.” In some cases, they even offer to extend financing without conducting a credit check.
Known as “buy here, pay here” deals, these auto loans can look attractive when you have bad credit. However, dealerships that offer this type of financing are also frequently associated with high-interest rates and low-quality vehicles.
#13. Look into Non-Profit Lenders
If you’ve struck out with the banks, and you can’t find a good loan through the dealerships, you might qualify for an auto loan through a non-profit lender. Some non-profits, such as the Capital Good Fund and Ways to Work, offer car loans to people with low incomes.
#14. Only Try for a Personal Loan as a Last Resort
However, there are quite a few reasons why personal loans usually aren’t the best option for buying a car. Because they’re not secured by collateral (the car), personal loans pose a higher risk for the lender. This means they tend to come with higher interest rates, which often makes them more expensive in the long run.
Personal loans can also be riskier for the consumer. In many cases, they involve more fees, and many lenders charge prepayment penalties if you choose to pay off your loan before the term ends.
#15. Keep the Loan in Good Standing & Make Additional Payments When Possible
If you have bad credit, an auto loan can help boost your score — but only if you make your payments on time. Make sure your budget can accommodate a car loan, as even a single late payment can lower your credit score.
You can also pay less interest over time if you make extra payments or pay off your auto loan early. Before you borrow, make sure your loan doesn’t impose any penalties or fees for early payoffs.
#16. Don’t Fall Victim to Predatory Loans
Unfortunately, people with bad credit are favorite targets of scammers and predatory lenders. Loan paperwork can be filled with legalese and financial terms that don’t make sense if you’re unfamiliar with them. Bad faith lenders know this, and they take advantage of your confusion and desperation.
Some dealerships even use bait and switch tactics to trap people into high-interest loans. For example, the dealer might let a consumer leave the lot with a car, with a promise to finalize the loan details later on. A day or so later, they contact the person, claiming the loan fell through and now the terms have changed.
This is why it’s important to do your homework and be willing to explore your financing options. It’s also critical to have a final, signed auto loan agreement before you take the car home.
#17. Read Your Loan Paperwork Carefully
Most car loan contracts include a great deal of fine print. Car salespeople might pressure you to breeze through the various contract provisions, initialing as you go, but it’s important to take time to read everything thoroughly — and to make sure the terms match up with the verbal agreements you made out on the lot.
The fine print is where you’ll often find hidden fees, extra charges, and taxes the dealership forgot to mention. These additional costs can quickly add up, making your monthly payment balloon past what you originally agreed to. Taking time to read and understand your loan contract can stop you from getting in over your head on your car payment.
#18. Resist the Temptation to Trade Up
If you’re trading in your current vehicle, it can be tempting to upgrade your next one. However, trading up means paying more, which can eat into your budget and make it more difficult to pay down your debts. Over time, this makes it tougher to work on boosting your credit score.
Car dealerships know how alluring a new car can be, and they work hard to get people to trade up for the latest and greatest model. If you’re carrying over a balance from your old loan, however, upgrading can just saddle you with extra debt you don’t need.
Get Informed Before You Get Behind the Wheel
Buying a car with bad credit can be a challenge, but it’s not impossible. With research and a little legwork, most people can find a car loan that fits their budget.
Before you start your car search, gather the tools you need to make an informed decision about your auto loan. Start by getting copies of your credit report and running the numbers on a reliable online loan interest calculator. If you’re willing to plan ahead and shop around, you can find a car—and a loan—you can afford.