If you’re looking to buy a car, your credit score and credit history plays a huge role in what kind of loan and interest rate you get. Lenders consider those with credit scores 600 and under to be “subprime borrowers.” If you fit into that category, it will be more difficult to find a lender willing to work with you.
Although it is possible to get approved by some lenders for car loans with bad credit, you’ll pay a premium in interest charges to borrow that money. As a subprime borrower, you could end up paying thousands more than you would have with a higher credit score.
Here’s how subprime lending works, and what you can do to avoid taking out a high-interest loan.
Applying for car loans with bad credit
If you’re in the market to buy a car, you likely will need financing help to complete the purchase. But if your credit score is 600 or less, you’re certainly not alone. According to Experian, one of the three main credit bureaus, subprime borrowers make up nearly 25 percent of the car loan market.
With a lower score, lenders view you as a riskier borrower. Lenders see a poor credit score and assume you will be more likely to default on your loan than someone with better credit. Some lenders will refuse to work with you at all, but there are companies that offer loans specifically for subprime borrowers.
If you’re looking for auto loans with bad credit, you can likely find a lender that will give you a loan. However, there will be a price to get it. The average rate for a used car for a “deep subprime” borrower — those with credit scores 500 and under — is 19.73%. But subprime auto loans can have interest rates as high as 29.99%.
How subprime auto loans can cost you
If you have to buy a car with bad credit, a subprime loan will cost you thousands more than if you had good credit.
The average used car loan for all borrowers, including those with great credit and poor credit, is $19,189. A borrower with a high credit score could get a loan to cover that amount with a 3.65% rate. If that borrower had a 72-month term, they’d pay back $21,396 in total.
However, if you’re a subprime borrower and qualify for a 19.73% rate with a 72-month term, you’d pay back $32,877 — that’s over $13,000 in interest charges. That higher rate also corresponds with a higher monthly payment, which can make it difficult to accelerate repayment or keep up with your other bills.
5 ways to avoid subprime auto loans
Subprime auto loans are often too expensive to be worthwhile, even when you really need a vehicle. Their high rates and pricey monthly payments can make it hard to make ends meet, and could force you to forgo other financial goals such as paying down your student loans or building an emergency fund.
If you can only qualify for high-interest subprime loans, it might be worth exploring alternative financing options or skip buying a new car entirely. You might have to sacrifice convenience for a while, but the savings will be worth it. Here are a few options to consider instead:
- Personal loans: Depending on your credit, you could apply for a personal loan and get a lower interest rate than you would with a subprime lender (especially if you have a cosigner).
- Pay in cash: This suggestion might sound impossible — after all, when you have low credit, it’s usually because you’re short on cash. But search around for a cheap used car; you might find a deal. If your income doesn’t allow you to save much, picking up a side hustle can help you earn extra cash.
- Improve your credit: If you can wait a few months to buy a car, take some time to improve your credit score. Boosting it by even 50 points can help you get a lower interest rate.
- Carpool: If you need a car primarily to commute, consider carpooling. Even if your coworkers don’t live near you, you might still be able to find someone who takes your same route. iCarpool is a site that connects people together to share rides.
- Car rentals: If you need a car only occasionally, borrowing a vehicle through services like ZipCar can give you the transportation you need at a fraction of the price of buying. Zipcar has a handy calculator you can use to see how much you’d save by using their services versus purchasing a car yourself.
Buying a car with bad credit
Buying a new or used vehicle is a big decision, but finding financing can be the toughest part. Although you can qualify for some car loans with bad credit, it’s a good idea to avoid subprime auto loans and their sky-high interest rates whenever possible.
For more information on saving money when car shopping, find out how to calculate what you can afford to spend on a new vehicle.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|