We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence. The offers that appear on this site are from companies from which TheSimpleDollar.com receives compensation. This compensation may impact how and where products appear on this site including, for example, the order in which they appear. The Simple Dollar does not include all card/financial services companies or all card/financial services offers available in the marketplace. The Simple Dollar has partnerships with issuers including, but not limited to, Capital One, Chase & Discover. View our full advertiser disclosure to learn more.
Best Bad Credit Auto Loans for May 2021
Our best auto loan for bad credit is from Carvana, which ranks at the top for customer satisfaction. We go into this lender and other best lenders of bad credit car loans, such as best dealership network (Capital One) and best auto refinancing (Lending Club).
In this look at best car loans for bad credit, we look at what a bad credit auto loan is, how they work, the pros and cons, when to use one, when to avoid one and other aspects of getting this type of loan.
We’ve assessed the best lenders for low-credit borrowers with our proprietary SimpleScore methodology by evaluating each lender’s rates, terms, customer satisfaction, customer support and fees.
We also analyze data from reputable third-party reviewers, such as J.D. Power, which looks at customer satisfaction, and Bankrate, which studies such factors as rates and fees.
The 5 best bad credit auto loans for 2020
- Best for No Money Down: Auto Credit Express
- Best for Auto Refinancing: LendingClub
- Best Dealership Network: Capital One
- Best Customer Satisfaction: Carvana
Bad credit auto loans at a glance
|Lender||New Car APR||Terms||Minimum Loan||Maximum Loan|
|Auto Credit Express||Varies||Match current loan or extend it by 12 months||$7,000||$43,000|
|LendingClub||8.05%–35.89%||Match current loan or extend it by 12 months||$5,000||$55,000|
|Capital One||Varies||24–84 months||$4,000||$50,000|
*Rates accurate as of May 2021.
Best bad credit auto loans
[ Read: Best Auto Loan Rates for 2020 ]
What is a bad credit auto loan?
Offered by online lenders, banks or credit unions, auto loans allow you to finance your car. Once you take out the loan, you repay your lender through monthly payments plus interest and any additional fees. A bad credit loan is the same as a traditional auto loan but tailored to your credit score. FICO scores are basically the GPA for your credit rating. Many factors contribute to your credit score, including payment history (whether you pay bills and loan payments on time and in full), debt-to-income ratio, age of credit accounts and the number of new account inquiries. A low credit score makes you a risky investment for traditional banks or loan agencies, though you still have options in non-traditional loans.
There are three factors that influence your loan and how much you’ll end up paying over time.
- Total loan amount – How much you need to borrow.
- Loan terms – Set by the lender, your loan term specified how long you’re set to repay your loan and how much your monthly payments will be.
- APR – Annual percentage rate is an evaluation of the affordability of the loan. It includes both the interest rate of the loan and any additional fees you pay.
If you don’t need a car immediately, keep in mind that there are things that you can do to improve your credit score before shopping for a vehicle. For buyers with a lower credit score, bad credit loans are available for non-vehicle financing.
How bad credit auto loans work
The first thing you should know is: auto loans are secured loans. This means if you fail to make your payments on time, you’ll lose your car. Applying for a loan with lenders means you’ll have to prove your ability to repay the loan and give the lender access to your credit history and other financial information. Don’t let the process surprise you. Gather all of your important financial information — pay stubs, existing loan and asset information — to make sure you’re prepared.
Regardless of whether you go through a bank, credit union or an online lender, once you’re approved you’ll receive a lump sum for your car purchase. Then, you pay back your loan to the lender, with interest, over the term of your loan.
How much you’ll pay each month will be determined by the loan amount, loan term and APR. Once you know your monthly payments, make a budget to make sure you’ll never fall behind. Making your payments on time will improve your bad credit and open up the possibility of refinancing. Refinancing an auto loan allows you to qualify for a lower interest rate and adjust your monthly payments.
Pros and cons of an auto loan with bad credit
A bad credit score will undeniably limit your options for the best auto loans. But that doesn’t mean you can’t buy a car with bad credit. A car loan can have a positive impact on your credit score if managed correctly. However, if you fail to make your monthly payments, it can damage your credit even further. Before you take out an auto loan, think about the pros and cons, so you know what you’re signing on for.
|No extra collateral||Risk of losing a car due to missed payments|
|Car ownership over lease term||Skipped or missed payments affect credit scores|
|On-time payments help increase credit scores||Bad credit car loans mean higher APRs and tighter restrictions|
|Option to refinance with good credit score||Vehicle will depreciate over the term of the loan|
When to use an auto loan for bad credit
If you can afford it, an auto loan is a good way to buy a car — even if your credit score is lacking. Undeniably, a bad credit auto loan will mean higher interest rates and fewer choices. Though if you have compared your options and planned your repayment, an auto loan can be beneficial.
Bad credit auto rates don’t have to be permanent. If you make your payments on time (or make extra payments if you can afford it), your credit score will increase and you can potentially refinance your loan. Refinancing a loan will allow you to find a lower interest rate and save money in the long run.
When to avoid an auto loan for bad credit
You should avoid even the best auto loan for bad credit if you cannot afford to pay it back. Signing on for a loan you cannot reasonably afford will damage your credit if you fall behind on your payments. Don’t be swayed by the “great” deals that require zero down and a seemingly reasonable monthly payment.
By the end of your term, you’ll probably have paid more than the car was worth because of a high interest rate. Don’t focus only on the monthly payment when shopping around; consider all the terms, fees and interest charges.
Especially if your credit is lacking, you might want to jump at any car loan that comes your way. But it’s essential that you examine the terms of the loan, making sure to avoid any predatory auto loan practices — like yo-yo sales, auto loan markups and loan packing.
How is auto loan interest calculated?
Interest is one of the main ways lenders earn a profit. The best bad credit auto loan rates vary and change daily. So getting prequalified before looking for a car will give you a better idea of what you should expect for interest. Auto loans are amortized and paid back with simple interest, which means you pay back the money borrowed plus a flat percentage rate.
Let’s say you borrow $35,000 for a term of 36 months at an interest rate of 11%. In this scenario, your estimated monthly payment will be $1,146, and over the term of the loan (36 months), you’ll pay $6,251 in interest.
If you take out the same $35,000 loan for 36 months at an interest rate of only 5.5%, your monthly payments will be $1,057, and you’ll only pay $3,047 in interest.
How does having bad credit impact an auto loan?
Your credit score is one of the most important factors in determining the rate you’re able to get for an auto loan. With a poor or fair credit score, meaning anything below 670, you can expect to get a higher-than-average interest rate.
Bad credit may also reduce your risk of being able to get a car loan at all. Financial Institutions take on risk anytime they lend someone money. The lower someone’s credit score, the more of a risk the bank deems them to be. If your credit is lower than the bank’s threshold for lending, you may need to work on increasing your credit score before you can qualify for a car loan.
Should you use a cosigner if you have bad credit?
If you can’t qualify for a car loan based on your current income or credit score, you might consider having a cosigner join you on the loan. A cosigner is an individual who signs the loan document with you and agrees to make the monthly payments in the event you can’t.
To qualify as a cosigner, someone generally must have a very good or excellent credit score. They’ll also need to show their ability to pay back the loan through their income and their debt-to-income ratio.
Keep in mind that if you fail to pay back your loan, it could impact the credit score of your cosigner. Only ask a friend or loved one to be your cosigner if you’re confident you can pay back the loan.
How to choose the best auto loan for bad credit
Step 1: Improve your credit score (if you can)
Before you start looking for an auto loan, the first step is getting a hold of your credit report and checking it for errors. Blunders on your credit score can negatively impact your credit score and can take up to 30 days to dispute, so being proactive is essential. Once you have a clear picture of where you stand on the credit spectrum, work towards improving it.
- Ask for a credit limit increase — You may want to ask for a credit limit increase on an existing account a few months before shopping for a car. This improves your debt-to-credit ratio and, in many cases, will impact your credit score — at least temporarily.
- Make current loan payments on time — Your track record for payments is one of the most critical elements that make up your credit score. It’s also one of the best ways to boost it.
- Reduce debt — Focusing your efforts on reducing debt as much as possible will improve your credit utilization ratio and simplify your finances. Not only will reducing debt make new payments more manageable but will increase your score. Find ways to cut your spending and use that excess to make additional payments toward your existing balance.
Step 2: Create a budget
You have to know what you can reasonably afford. Entering into a loan that you can’t repay is a financial misstep you may not recover from. Take a look at all of your spending and decide what you can eliminate and what you can’t live without. Don’t overestimate how much you can commit to saving each month; be realistic about your financial situation. Creating a budget eradicates the unknowing of how much of a loan you should take out.
Step 3: Shop around
A bad credit score can make getting a car loan tricky, but that doesn’t mean you have to settle for whatever rate comes your way. You don’t need to limit yourself to one lender. Rates will vary across granters, so take the time to do some research and compare options. Getting prequalified will get you rates from lenders, but they are subject to vary since they are only based on a soft credit pull.
Step 4: Review and finalize loan
You don’t have to jump at the first offer that comes your way, and you should always compare options. Look at the loan term as a whole, not just the monthly payment. A lower monthly payment will mean more interest over time. If you’re not careful, you could end up paying more than your car is worth. You’re always looking for the most favorable terms, though remember to be realistic about how much you can afford to repay each month. When your loan is finalized, immediately plan how you’re going to repay it.
What you should consider when choosing a bad credit auto loan
- Loan Term: Some bad credit car loans will let you extend the loan up to 84 months to reduce your monthly payment. This can be appealing at face value, but the truth is you’ll pay much more in interest if you extend the term. Try to limit your loan to no more than 60 months.
- Fees and Penalties: Many lenders may also stick you with high fees and penalties because you don’t have a great credit score. Pay attention to monthly late fees as well as any prepayment fees.
- Cosigners: You may need a cosigner if you’re applying for a bad credit auto loan. Make sure you understand what the cosigner is required to present to qualify, and what the consequences are for them if you fail to pay on time.
Bad credit refinancing
Refinancing a car loan can help lower your monthly payment if your current payment is no longer affordable. It can also help you reduce your interest rate. When you refinance a car loan, you pay off your current loan by taking out a new car loan.
The best refinance terms will generally go to those with the best credit scores. With bad credit, you may end up with unfavorable terms like a higher interest rate.
If you have bad credit, shop around for lenders that lend to borrowers in that situation. If you have adequate income, you may still qualify for a refinance loan. If you’re still struggling to find a lender who will let you refinance, you might also consider asking someone else to cosign your loan.
[ Read: Best Refinance Auto Loans for 2020 ]
[ Read: Is a Personal Loan My Best Option? ]
We welcome your feedback on this article and would love to hear about your experience with the auto loans we recommend. Contact us at firstname.lastname@example.org with comments or questions.