Your car loan options may seem limited when you have a low credit score. But there are lenders willing to help.
borrowers with poor or no credit are seen as high-risk, lenders tend to charge significantly higher interest rates and fees. And it’s likely you’ll have to put up collateral — often your car — or get a cosigner to be approved.
Our top pick for bad credit car loans: car.Loan.com
Get matched with a local car dealership to finance your car purchase. Bad credit, no credit OK.
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7 things you need to ask about bad credit car loans
Buying a car is one of the bigger purchases you’ll make in your life, so shop around to make sure you’re getting the best deal. Before you apply for any loan, find out as much as you can about the offer you’re getting. Here are some key things you need to look for before you proceed.
What’s the interest rate?
The interest rate on your loan will affect how much your payments are. Always know what rate you’ll pay, and take the time to compare it against other car loans to be sure the offer is competitive.
Is the loan secured or unsecured?
If you take out a secured loans, then that the lender is using your car as security for the loan. While this means you may have a lower rate, you run the risk of having the car repossessed if you default on the loan. Unsecured loans are reserved for people with a higher credit rating and the application process is much simpler.
What’s my loan term?
Loan terms can run from a year and as many as seven years. A shorter loan term can reduce the amount of interest you pay on your loan overall and help you get out of debt quicker — but monthly payments will be bigger.
On the other hand, choosing a longer loan term will reduce your monthly payments, increasing the amount of interest you end up paying.
What’s my minimum payment?
You want to find affordable minimum payments that you can expect each month. It’s important to choose a loan term that suits your income and is in line with your financial plans.
Can I make any extra payments?
The flexibility of making extra payments can help you get out of debt much quicker. Check with your lender to see if it allows extra payments.
What kind of loan fees will I pay on a poor-credit car loan?
Some lenders charge a monthly account fee or administration fee on bad-credit car loans, ranging from $5 to $15 per month. Many will also charge an origination fee to create your loan — this fee is typically represented as a small percentage of 1% to 3% of the loan.
Can I pay off the loan early without being penalized?
Some loans include early repayment fees if the loan is paid in full before the agreed loan term date. If you intend to make extra payments to pay your debt off sooner, check how much you might be charged.
What to avoid with a bad credit car loan
Make sure you know exactly what you’re getting into before you sign up for a car loan — or any loan. If you don’t do your research, you could find yourself in a financial nightmare, or worse — in a scam.
- Going over budget. Work out how much money you’ll be paying back over the course of the loan to get an idea of how much you’ll spend on your vehicle — is it worth it, and more importantly can you afford it?
- Check user reviews. Check review sites, messages boards and car enthusiast websites to see what other people have to say about certain lenders. If you know someones who’s been in a similar position when financing a car purchase, ask them.
- Extremely long loan terms. Some lenders offer loan terms of six and seven years that can accrue major interest over time. Sure, the monthly payments will be lower, but if it’s not absolutely necessary, it should be avoided to save money.
- Being unprepared. Check your credit score before you do any car shopping so the dealer or lender can’t take advantage of you. Also, by knowing interest rates that other lenders offer, you’ll be able to compare and find the most competitive deal.
- making an impulsive purchase. Of course your dream car is out there. But if you have poor credit, it may have to wait so you can buy a car you can afford — and has lower rates.
Alternatives to consider
If a bad credit car loan isn’t the right choice for you, you could consider using a credit card to buy a car. The smart way to pay for a car purchase with a credit card is to buy a cheap car and take advantage of a low interest rate or 0% offer. This way you pay off the balance gradually without the hefty charges associated with a regular credit card or personal loan.
Another way to avoid taking out a bad-credit loan is to wait. Work towards improving your credit rating by controlling your debts, managing your finances responsibly and knowing what’s on your credit file so you can remove any errors or disputes from your file.