How to Get a Car Loan with Bad Credit? | Car Financing and Credit Tips

How to Get a Car Loan with Bad Credit? | Car Financing and Credit Tips

Buying and owning a car can be expensive but it gives you the freedom to commute whenever and wherever you desire. Moreover, it is extremely convenient for families too. Furthermore, you no longer need to wait for a bus to arrive or spend money on travel tickets.

  • 90% of new vehicles are financed in Australia. (2021)
  • 81% of new vehicles are financed in America. (2021)

Self-financed vehicle purchase may be challenging for some which are why they go for auto loan options. Lenders consider credit reports of potential borrowers to ensure that they would be able to repay the borrowed money.

These credit reports are issued by credit bureaus like Experian, Transunion, and Equifax. Whether it’s an Experian, Transunion, or Equifax credit report, the bureaus review your credit activity to generate your credit score.


After mortgage loans, car finance/ auto loans are some of some primary personal loans. Since a car may be worth thousands of bucks, an auto loan makes a car purchase possible. This loan amount is returned through monthly installments and lenders charge an interest rate as the cost of this facility. 

Bank of America Auto Loan, Capital One Auto Loan, Carvana Auto Loan, and Lightstream Auto Loan are some of the best car finance options today.

Types of Auto Loans

Pre-computed Interest Loans In such loans, the number of returns and interest rates is pre-determined. It is a predictable car loan kind. Even if you repay the borrowed money before the set time, the pre-promised interest rate is still payable. 
Unsecured Auto Loan Unlike secured car finance, this loan has no collateral as security. The terms are decided after judging your credit scores and have high-interest rates comparably.
Lease Buyout Loan When you lease a car, you pay to purchase a car from the dealership at the end of this lease tenure. Lease buyout loans enable buyers to make payments to lenders until they clear the balance fully.
Simple Interest Loan You can save interest payable by paying earlier since interest is accrued on the remaining balance only in simple interest loans.

  • E.g. if you borrowed $50k and returned $30k – your remaining interest will be calculated on the remaining $20k balance.
Secured Auto Loan These are the most common loans. In secured loans, the vehicle is signed as collateral. So, if the borrowing party fails to clear the balance, the lending institution has all rights to possess the vehicle.


Auto Loans and Credit Scores | Why does credit score matter?

A credit score is a scoring model used to determine the risk involved in lending money to the potential debtor. A good credit score means a low-risk borrower and a weak score means a high-risk borrower. Some factors which influence this score are:

  • Repayment history
  • How much have you borrowed?
  • How many financial accounts are open in your name?

How do Credit Scores affect Auto Loans?

No lender would desire a default on the lent money. To check how credible you are, they observe your credit rating. Your cash flows, income, terms with prior lenders, and some other factors are gauged to know that you can afford this loan and you have planned budgets for the vehicle.

Credit bureaus like Equifax, Transunion, and Experian issue this credit score. Following dynamics influence your credit report:

This is a measure of how often you inquire for credit. Too many credit inquiries can pull down your credit rating and affect your future loan terms.

Therefore, it is advised to play it lightly when applying for credit.

How long has it been since you’ve opened the accounts? This age allows the lending institutions to determine how you have dealt with debt in the past:

  • Any borrowing experience in the past?
  • Do you repay on time?

You have a credit limit and it’s wise to not over-consume this limit. Consider borrowing and paying simultaneously and later applying for new credit.

Utilizing too much credit can dent your credit report.

Creditors are keen to know:

  • Do you repay debts/ loans/ card balances late?
  • How late do you repay?
  • Do you have any outstanding balances? What’s your balance (if any)?

If your payment history is weak, you may qualify for costly and lesser car financing options.

There can be several credit account types in your credit report:

  • Credit cards
  • Mortgage/ home loans
  • Car loans
  • Student loans

This displays your experience with distinct credit sorts!

How do Car Loans affect your Credit Score?

The road is two-way since auto loans also impact your score. These loans can affect credit ratings in two major ways:

  1. When you apply for auto finance while buying a new car, this application is recorded in your credit report as a hard inquiry and may affect subtly (too many hard inquiries destruct your credit history) your score.
  2. If you repay the loan with lazy and non-diligent behavior, you must be ready for a score drop as weak payment history badly impacts the credit ratings. 

How to Get a Car Loan with Bad Credit?

If your credit score is bad, the best thing to do is to take steps that would improve the rating. Because a poor credit score means high-interest rates and lesser loaning opportunities.

But if you can’t wait to be a car owner, the following points would help you get approved for car financing:

Pay Off Debts 
Deposit Increase
Banks | Online Lenders | Dealerships
Bad Credit Car Finance
Don’t Overdo Car Loan Applications
Consider a co-signer
Don’t Rush and Compare Lenders
Cheap or Small Vehicle


Pay Off Debts

To get a car loan with bad credit, try paying off as many debts as possible because rotten payment history is destructive in the eyes of the lender and so is a high debt to income ratio. 

Deposit Increase

A higher deposit and down payment are the signs of reliability for the lender. A bigger deposit means comparably lower borrowed money. 

Banks | Online Lenders | Dealerships

Different borrowing options with different approval criteria are existent for auto loan borrowers:

If you have an account in a bank, it may be slightly easier for you to be accepted for auto loans due to a previous relationship. They may also lend you a rough estimate of the loan amount and monthly payments you qualify for.

How to Get a Car Loan with Bad Credit? | Car Financing and Credit Tips

Online lenders also offer auto financing today. You can ask your relatives/ colleagues for reputable and trustworthy organizations. This can shrink your list and you can contact them smoothly.

Car dealerships also offer auto loans but are observant of any irrelevant fees and extra charges. Interest rates with bad credit are higher but do your research to save yourself from scams and fiddles.

Bad Credit Car Finance

One of some better options for bad credit score holders. You won’t be requested for fatty deposits upfront and would pay a fixed amount of monthly installments.

Don’t Overdo Car Loan Applications

Credit inquiries are noted in credit profiles and lower credit scores. So, do your research and apply for the most suitable borrowing options.

Consider a co-signer 

A co-signer is the person who takes the responsibility to repay a loan in case you default and have a good credit history. Your credibility to repay boosts for a lender when you bring a co-signer.

Don’t Rush and Compare Lenders 

Shop around and pick the best suitable option offering a lesser interest rate and better value.

How to Get a Car Loan with Bad Credit? | Car Financing and Credit Tips

Cheap or Small Vehicle 

If your credit score and income can’t afford your desired big car, settle for a smaller car which would require lesser borrowed money and higher chances for you to get approved for a car loan.

What You Should Know Before Applying for Car Loans?

  • Loan Terms 
  • Budget Allocation 
  • Used or New Vehicle? 
  • Car Specifications 
  • Hard Inquiry | Soft Inquiry 
  • Lending Institutes review your Income and Debt Situations 
  • Interest Rates 
  • How Personally Stable are you? 
  • Compare Rate Offers for Auto Loans 
  • Down Payment 
  • Total Cost vs. Monthly Payments 

Loan Terms

Interest rates and vehicle prices are determining factors of loan terms aka duration of loans. General loan durations vary from two to eight years. A general recommendation is to repay the car loan payments fast to get rid of accruing interest rates as these rates can be very expensive.

Budget Allocation

The car choice shouldn’t be a hasty and emotional activity. To determine what you can afford, look into your income, and subtract your monthly expenses (bills, previous debts, etc.) and monthly savings (for retirement, child education, for instance). 

You must also not forget to consider other car expenses like:

Used or New Vehicle?

Both options are available for potential car buyers. It majorly depends upon your budget and personal choice. However, if you go for a used car, hire a mechanic for a professional inspection instead of hustling because sometimes the maintenance costs of pre-owned cars are very high.

  • 66 million cars were sold worldwide in 2021 as per an estimate.

Car Specifications

Besides affordability, you can also list the car specs you are interested in or the car specs which are most suitable for you like:

  • Sunroof
  • Petrol/ diesel as fuel
  • Engine condition
  • Air condition
  • Cruise control
  • Seating quality and durability
  • Vehicle color

So many car company options are available, so if you have a clear idea regarding car specifications you desire, choosing can get easy. 

Hard Inquiry | Soft Inquiry

Whenever you apply for an auto loan approval, creditors undertake a credit inquiry to judge your credit history and classify you as a low, medium, or high-risk borrower.

If creditors do a light check, it’s counted as a soft inquiry and doesn’t affect credit score as such. On the other hand, if they deeply analyze your report, it’s considered as a hard inquiry and your score may be pulled down. 

Lending Institutes review your Income and Debt Situations

In case you have got a bad credit score, the lenders might check your income situation and monthly expenses to determine your:

  • Down Payment
  • The interest you qualify for
  • Any other fees

Interest Rates

A good credit score and fair monthly cash inflows lead you to better interest terms. Once good interest rates are obtained, don’t settle on repaying late to avoid any late fees.

Also, don’t forget to compare interest rates offered by financial institutions and select the one with better interest rates and relevant terms.

How Personally Stable are you?

Car loans can be worth thousands of dollars, so to ensure that the debtor would clear the amount responsibly – he/ she may also check your employment history and residence alongside credit report and monthly income. 

Lenders are comfortable lending to personally stable people. They get better auto loan terms than relevantly unstable potential debtors.

Compare Rate Offers for Auto Loans

Apply for multiple car finance options before choosing one and select the one with the best relevant terms and interest rates. After you start these loan applications, all submissions made within two weeks will be counted in one inquiry in your credit file.

How to Get a Car Loan with Bad Credit? | Car Financing and Credit Tips

Down Payment

When you apply for car loans, lenders are keen to look into your down payment amount. This amount reflects how much you are contributing to the vehicle.

A higher down payment means a lesser loan amount and a better LTV ratio.

Total Cost vs. Monthly Payments

Sometimes, monthly payments offered are lower than competitors but the accumulated total payment is more. Beware of it while choosing the bank/ online lender/ other financial institutions.


How much down payment should I have for a new car?

It depends! A new and good vehicle will have a high-interest rate and would require a higher down payment. If you want to pay less monthly, go for a medium-quality car and pay a high down payment.

What is a good score for buying a new car?

661 or higher is a good credit score for better lending options.

Should we consider an auto loan to buy a car?

Paying with cash has its benefits like no interest and no effect on the credit file. Borrowing has its perks like a chance to build a credit history and mushrooming savings side by side.

Loaning or not loaning depends upon your preferences and income situation.

What is the duration of auto loans?

It usually ranges between two to eight years.

What happens when you repay a car loan?

After repaying, you can get a car ownership title. You may also qualify for better car insurance rates. Moreover, you need to check the credit report for its effects.

Can you cancel car finance?

After loan approval, you can cancel this credit agreement within 14 days as per Consumer Credit Act.