How to Get a Car Loan with Bad Credit

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It may feel impossible to get a car loan with bad credit. But here's the truth: while getting a car loan with a lower credit score may be more challenging, it can still be done. In fact, you can get a car loan (even with poor credit) by following a few simple steps. In this article, we'll cover how to get a car loan with bad credit. Keep reading to learn more. 

Know and Understand Your Credit Score

Your credit score is a 3-digit number ranging between 300 and 850. It showcases your "trustworthiness" when it comes to handling credit. You can think of it as a representation of the level of risk (or the likelihood) you have when it comes to paying your bills, handling credit, etc. Lenders and creditors view your credit score as a determining factor when considering whether they should approve you or not for a money loan. 

Here is how a credit score ranges:

• 300 to 580 - bad
• 580 to 670 - decent
• 670 to 740 - good
• 740 to 800 - great
• 800 to 850 - excellent

Your credit score can also influence variables such as the types of loans you qualify for, how much you can take out on a loan, and even the interest rate you receive. As a result, knowing and understanding your credit score is essential, especially if you want a bad credit car loan.

Improve Your Credit Score Before Applying

The best thing you can do if you have a bad credit score (and want to obtain an auto loan) is to improve your credit. So, before you look for a lender, be sure you've taken the time and effort to improve your credit score. This will go a long way when it comes to the terms of your loan. Here are a few simple ways you can improve your credit score:

• Make your payments on time
• Pay down your balances
• Ensure you remain current on all accounts
• Dispute any incorrect credit report information
• Don't take out any new credit applications

To improve your credit score, you have to stop spending so frivolously. Moreover, you also need to pay off any current consumer debt as quickly as possible. All of these simple tactics can be the solution on how to get a car loan with bad credit.

Save for a Down Payment

Another tactic that can help improve your credit (and get more favorable terms for your car loan) is to save up a bigger down payment. A smaller down payment often results in a higher interest rate, which will take longer to pay off. Conversely, a larger down payment will have more favorable terms, which may include a lower interest rate, which will help you pay off the loan faster while also spending less.

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Explore Bad-Credit Auto Lenders

The unfortunate truth is that you may need a vehicle fast. As a result, you may not have the time required to improve your credit score. If this is the case, another option is available. And that is to explore bad-credit auto lenders who can help you get the financing you need. 

Types of Lenders to Consider

There are a few types of lenders you should consider when applying for a car loan with bad credit. Here are some examples to think about:

• Indirect auto lender: You can find these lenders through dealerships or online. You don't face the person with an indirect dealer. Instead, the dealership's finance manager acts on behalf of the lender. Moreover (and it's important to keep this in mind), the typical interest rate may vary based on the type of indirect lender you select.
• In-house: In-house financing entails that lending occurs at the dealership and is done by the dealership. Many in-house financing dealers won't even look at your credit reports. As a result, they are where struggling borrowers with credit challenges go when they need a car loan. These lenders tend to have interest rates that are higher than usual. 
• Direct auto lender: You can find direct auto lenders at banks, credit unions, or online. You talk to them directly, and if you get approved, you get a check with the borrowed amount you qualify for. 

Comparing Loan Offers

When comparing your car loan offers, ensure you have several options so you can choose the best one for you. People typically focus on monthly payments. And that's understandable. However, you should also take a few other factors into consideration, namely: 

• Time period of the loan
• Interest rate and annual percentage rate
• The loan amount
• Total amount you finance, etc.

All of these details will help give you a clearer picture of what the loan (and its terms) entail. As a result, you can make a more well-informed decision regarding how to get a car loan with bad credit.

Prequalify with Multiple Lenders

As you shop around for your auto loan, try applying for multiple loans. Multiple inquiries within a short time frame are often seen as a single inquiry by many credit scoring models. As a result, this can reduce the possibility of potential credit score damage.

Shop Loan Terms, Not Just Monthly Payments

Here's where many borrowers go wrong: They take out an auto loan based on monthly payments alone and don't even consider any other conditions. Here's the deal: Monthly payments are important, yes. However, they're only a single factor that can contribute to the quality of your auto loan. Other loan terms can include:

• Interest rate
• Length of loan
• The amount borrowed 
• Down payment requirement and more

By taking the time to shop for loan terms as well as monthly payments, you stack the deck in your favor to get the best auto loan possible. 

Consider a Co-Signer

Getting a co-signer is also another plausible solution on how to get a car loan with bad credit. Your co-signer represents a sign of good faith. They, as a result of signing the auto loan contract's terms and conditions, willingly and legally become responsible for the loan (if you fail to pay). So, if you have a bad credit score (or no credit history at all), getting a co-signer on the loan application can be a great "loophole" to influence the lender to approve your auto loan. 

Reduce the Amount You Need to Borrow

You may also want to consider reducing the loan amount. While this may result in an interest rate spike, it could also help you get your auto loan faster than you could if you decided to forego this step. For this reason, simply reducing the borrowing amount on your car loan may be the solution you've been looking for. The general rule of thumb is that you don't want to go any lower than 20% down.

However, if you're in a pinch and need a car loan fast, reducing the loan amount to 15% or even 10% may be a possible solution to help you get that car loan quickly. But beware: If you do opt for this decision, it could result in a higher interest rate on your loan. 

Be Prepared to Show Proof of Income and Stability

Lenders will want to see that you can repay the loan. As a result, financial stability and proof of income may be required. Be prepared with bank stubs, monthly credit card statements, or even a bank statement. Proof of income will support your financial credibility and will make lenders more likely to provide you with the auto loan you need.