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Having bad credit doesn’t mean you can’t own a nice, reliable car. While it may be challenging to get financing, you may still qualify for a car loan. Consider using a co-signer or finding a lender that works with people who have bad credit. Applying with a co-signer may get you better terms but puts your co-signer on the hook, while loans for bad credit often charge higher interest rates. Let’s take a look at how each works, including their benefits and drawbacks.
Key Takeaways
- If you have bad credit, a co-signer with a good credit score can help you qualify.
- Some lenders work with people with bad credit, but they charge higher interest rates.
- Look for ways to improve your credit score, shop around, and compare offers by pre-qualifying with several lenders.
- Be wary of predatory lenders that don’t conduct credit checks and charge exorbitant interest rates.
Option 1: Apply With a Co-Signer
If you can’t qualify for an auto loan on your own, a co-signer can sign the loan agreement with you and take responsibility for the loan if you stop making payments. This could be a family member, friend, or other trusted individual. Having a co-signer lowers the risk for the lender and increases your odds of approval because if you fail to make payments, someone else is also responsible for paying back the loan.
Along with the basics like ID, your co-signer needs the following:
- A good credit score and a strong payment history
- A steady income with stable employment
- A low debt-to-income (DTI) ratio, which shows how much of their income goes to pay their debts each month
Your approval odds are better with a co-signer, especially if their credit score is good to excellent—usually 670 or over. Their credit score can also factor into your interest rate; the higher their score, the lower your rate may be, which means you pay less interest over the life of the loan. Having a co-signer can increase your chance of getting better repayment terms, giving you time to rebuild your credit as long as you keep up with your payments.
Even if you’re able to qualify on your own, a co-signer can help you get a less expensive loan.
You must be responsible if you use a co-signer because the loan account will appear on both of your credit reports. If you don’t pay your bill, the late payments will hurt both of your credit scores.
Furthermore, the co-signer is on the hook to pay the loan off if you stop paying. They must assume financial responsibility for the loan or their credit will be damaged and the lender may come after them for the money. Lenders typically don’t release co-signers from loans because it increases the risk.
Warning
Auto loans are usually secured with the vehicle as collateral. If you default, the lender can seize the vehicle and sell it to pay off the loan. The lender can take legal action against you (and your co-signer, if any) to recoup any outstanding balance that remains.
Option 2: Find a Lender That Works With Bad Credit
A car loan for bad credit is a type of financing designed for those with low credit scores. Although the exact number varies by lender, a bad (or poor) FICO score is typically 580 or below. Because they are tailored for people with poor credit, they’re also called subprime loans.
The requirements for these types of loans are generally:
- A relatively low minimum credit score, which varies by lender
- A stable income and employment, which you can demonstrate with pay stubs and/or an employment letter
- A certain DTI ratio, which shows you can manage your debts
- Financial history with bank statements
- A down payment (which may be higher than if you have a co-signer)
If you have bad credit, you may be able to get a car loan from direct lenders, such as banks and credit unions (including online lenders). These are always a good place to start, especially if you have a good history with your financial institution. If you can’t secure a car loan through traditional lenders, you may want to consider dealer financing.
Getting a loan can help repair your credit as you establish a positive credit history with on-time payments. However, if you have a low credit score, your loan will likely have a high interest rate. It’s important to carefully weigh your options when considering a bad credit auto loan. If you can’t keep up with the payments (which may be relatively high due to a higher rate), you risk further damage to your credit.
Pre-qualify with several lenders to find the best terms you can get, which won’t hurt your credit score. However, watch out for buy here, pay here (BHPH) car dealerships that offer in-house financing for used cars, which often come with steep interest rates and weekly or bi-weekly payments.
Smart Moves to Boost Your Odds of Approval
You can increase your chances of getting approved for a car loan by doing the following:
- Reviewing your credit reports and checking for errors
- Improving your credit score by making on-time payments and reducing credit utilization
- Saving for a larger down payment
- Lowering your DTI ratio
- Choosing an affordable vehicle
- Seeing if you pre-qualify or are pre-approved
- Shopping around for the best interest rates
Watch Out for Predatory Lenders
Be aware of predatory lenders that use unfair tactics to exploit borrowers, especially those with bad credit, and trap them in a vicious cycle of debt. Watch out for red flags like a rushed process, no credit checks, hidden fees, sky-high interest rates, loan packing (including extra features or services without your consent), and a general lack of transparency.
The Bottom Line
Having a bad credit score can make it challenging to get a car loan, but it isn’t altogether impossible. It might mean you have to do a little more work. Using a co-signer or choosing a lender that works with poor credit can increase your approval odds. Regardless of your credit level, doing the right research before buying a car can save you hundreds of dollars in interest.
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