Have Bad Credit? Think Twice Before Applying for a Car Loan

car loans with bad credit

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.

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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!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.