A bad credit score for a car loan is generally defined as in the mid-600s or below. VantageScore and FICO are the two most commonly used credit scoring models, and their scoring tiers differ. Also, some auto lenders use a slightly different FICO model specific to the auto industry.
When deciding whether to approve an auto loan, lenders do consider factors in addition to credit score — such as payment history, steady income, length of employment, amount of debt and loan amount. So, if your credit score falls into the “bad” tier or lower, it’s still possible to get approved for a car loan when other factors are in your favor. You may find more restrictions though, for example a lender may require a shorter loan term.
About 1 in 6 auto loan borrowers in 2021 had credit scores below 601, according to credit reporting company Experian.
Types of lenders that offer car loans for bad credit
Many different types of lenders offer bad-credit auto loans. When you have bad credit, it’s especially important to apply to more than one lender. Lender requirements vary, and one may be more willing to work with you than another. Also, having multiple loan offers later enables you to take the lowest-rate one to the dealership and ask the finance office to try to beat it.
Banks and credit unions, known as direct lenders, are a good place to start. If you already have accounts in good standing there, they may be more willing to work with you. Direct lenders can be 100% online or have physical locations.
Online loan marketplaces that work with a network of lenders are another option. They provide the convenience of applying to multiple lenders with one loan application.
Online car retailers, such as Carvana, also offer financing for bad-credit borrowers.
Auto dealerships also offer access to bad-credit auto loans. This is where most people find their loans. Finance officers there often have long-standing relationships with banks and credit unions and make either a flat fee or a percentage of the amount borrowed. They also have the ability to adjust interest rates within a lender's guidelines. That's why it’s best to bring your lowest-rate offer from another lender to the table.
Some dealers offer their own in-house financing for bad-credit customers, and borrowers make payments directly to the dealer. These dealerships may advertise "no credit check" or "buy here, pay here." Buy here, pay here loans are typically the most expensive way to finance a car.
Comparing bad-credit auto lenders
Instead of applying to a random lender, crossing your fingers and hoping you get approved, look first to see if a certain lender makes more sense for you.
For example, not all lenders allow co-signers. So if you think you may need one to qualify for a loan, apply only to lenders that accept co-signers. If you have a limited credit history, or none at all, look for lenders without a credit history requirement.
If one of your goals is to build your credit with an auto loan, ask if the lender reports payments to one or more of the three major credit bureaus — TransUnion, Experian and Equifax. That way, your record of on-time car payments will be available to future lenders.
To compare lenders and rates in a way that won’t affect your already low credit score, look for lenders that allow you to pre-qualify for a loan with a soft credit check. Pre-qualification is also a good way to determine if you will qualify for an auto loan at all.
If you do receive pre-qualified offers and want to compare them, NerdWallet’s auto loan calculator is a helpful tool. You can input the estimated rates lenders have given you, add in down payment or trade-in amount, and see your resulting monthly payment as well as total loan cost.
Borrowers tend to pay more for bad-credit auto loans
Lenders charge higher interest rates, and sometimes more in fees, for a bad-credit auto loan. They do this to compensate for the added risk that a borrower may not pay off the loan.
Typically, a bad-credit borrower can expect to pay a lot more for a car loan. 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.
So you have an idea of what rates to expect for bad-credit auto loans, here are average auto loan rates by credit score based on VantageScore.
Source: Experian Information Solutions.
Improving your chances of getting a bad-credit car loan
Actually, it’s likely that you will find a lender willing to approve a loan for you, regardless of your credit score. Some lenders make loans only to people with bad credit, but usually with a very high rate. The key is to find the lender with the lowest rate possible and a payment you can afford, so you can buy the car you need, make payments on time and build your credit.
If you find your only option is to settle for a high interest rate, then commit to making your payments on time and look into refinancing your car loan at a lower rate as soon as you can.