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How to Get a Car Loan with Bad Credit

Bad credit doesn’t have to mean you can't get a new car.

Conventional knowledge, or maybe your own personal experiences, might suggest that you can't get an auto loan if you have a bad credit score. A bad credit score can mean different things to different people, so for this exercise we're thinking about people with FICO scores lower than 600.

The trouble with falling under this credit range is that sometimes your options are going to be limited. As a result, your loan options may be limited. This makes it possible for lenders to charge high interest that borders on predatory behavior, or offering you long loan terms that may have a longer life-span than your new car. 

Don't worry though. You're already taking the right first step. The best thing you can do for yourself is some research so that you can avoid any shady dealer behavior. Here are 5 steps you should take being walking into a car dealer if you have bad credit.

1. Know your credit scores

You know your credit score or you wouldn't be here. But, do you know that all credit scores are not created equal? Credit Karma, for example, typically provides a Vantage score, which isn't used by lenders when they make a loan. Your vantage score can vary from your FICO score, the score lenders use to make loans, by over 100 points. 

There are plenty of places that will let you view your FICO score for free. We recommend Discover's Score Card for two reasons. First, it's a free FICO score from a company that routinely ranks at the top of J.D. Power's list of best customer service. Second, Discover specializes in helping consumers with bad to average credit build a better credit score. Their secured credit card is top notch. 

Maybe you'll find out that your score isn't actually as bad as you thought. That's the ideal situation. However, if you find yourself in the sub-600 club there may be things that you’re able to fix immediately. Take a look at removing any incorrect information, which you can do online in most cases.

2.  Know your budget 

Never walk onto a car lot without knowing what you can afford. Everyone's budget is a bit different, so this rule might not work for you, but your car payment + insurance payments shouldn't be more than 10-15% of your take home pay each month.

Additionally, you should try not to take out an auto loan for more than 4-5 years. After 5 years you may start to notice your car deteriorating and you'll be outside of most warranties. The last thing you'll want to do is find yourself out of the warranty period with 2 years of auto payments to make. The result in most cases is rolling old debt into a new car loan. No good.

3. Get prequalified with banks or a local credit union

After you know what your budget is, you should see if you can get prequalified for a loan before you start shopping. Here's why this is step 3 and not step 2: it is in a bank's best interest to give you a loan for as much as they think you can pay back. The amount they come back with might be higher that you thought you could afford. Stick to your guns on this and only use the preapproved amount you go in to the bank knowing you can afford. 

We really like Capital One's Auto Navigator product for prequalification. Rates start at 7.99% APR for credit rebuilders (as of 5/13/19) which is fairly reasonable. Prequalification takes a few minutes. Once you have your numbers and rates, Capital One will even help you search cars within your price range online, so you can go through the whole research process without any high-pressure sales pitches. 

4. Make sure you know the terms of the loan, and value of the car you want to buy

If you negotiate car prices and rates at a dealer, make sure you do so separately. Get prequalified and then look for a car. This allows you to negotiate the price on your car after knowing what your rates are. This might seem like common sense, but if you don't do things this way then it's easier for a dealer to agree to a price on the car and then play with the financing rates and fees so you end up paying more for the car.

5. Bring someone you trust

This is an area where pride is your friend. You've done your research. Come up with a game plan and share it with your buddy and have them tag along to the dealer. They'll be there to remind you of your plan and talk you out of any bad decisions when that new Mustang catches your eye, even though you know you have a Nissan Versa budget.

Common Cents - Know when you're not ready

This one is the hardest ones, especially if you need a car. If a loan isn't in the cards right now, hit up those used car listings on Craigslist. There's nothing wrong with riding around in a beater for a while. Our 92 Chevy Cavalier did us proud for a while. Establish a savings and build a better credit score with a service like Self Lender, or a credit builder account from your local Credit Union. Build a better you, then ditch the 92 Cavalier and upgrade to a nice BMW. :)