Bad Credit Auto Loan
Almost everyone has a credit score, and about 90% of top lenders use FICO scores when evaluating someone for a loan. Having a low credit score can make it difficult to get an auto loan with a low interest rate.
Bad or Subprime Credit Scores
The three main credit bureaus—Equifax, TransUnion and Experian—all calculate a person's score differently. However, they generally use the same criteria in their calculations.
If you're wondering where your credit score rates, here is an approximate list of ranges:
- Excellent credit: 740 to 850
- Good credit: 680 to 740
- Acceptable credit: 620 to 680
- Subprime credit: 550 to 620
- Poor credit: 300 to 550
Credit Rating Factors
Activities that negatively impact your credit score include:
- Late or missed payments.
- Bankruptcy, foreclosure, or defaulting on other loans.
- Little or no history of credit.
- Having no assets that serve as collateral (e.g. a home or car).
- Too much existing debt.
Best Options for Bad Credit
While having bad credit can make it very difficult to get a car loan, it is not entirely impossible. With a little work, you may be able get an auto loan at a reasonable rate.
Typical Auto Loan Rates for Bad Credit
For someone with a lower credit score, a good interest rate can be as little as around 6.5%. It can also average as much as 13% or more when buying a used car.
Rates for someone with average credit usually are around 5 to 6%.
Improving Your Chances of a Better Rate
The likelihood of obtaining a better interest rate on an auto loan will be higher if you're able to follow these steps:
- Plan for the new car loan at least a few months in advance. During that period, be sure to pay all your bills on time in order to improve your credit rating. *
- Save as much as you can. Lenders sometimes offer preferable terms and rates when a borrower can pay around 20% for the down payment.
- Shop around. With the majority of consumers in the average, subprime and bad credit categories, there are more and more loans being made to this group.
* Paying bills late is one of the fastest ways to damage your credit, and improving your rating by just a few points can bump you from one credit category to the next and make a big difference in the rate you receive.
By ordering your credit report, you can see your actual financial history and how it varies from bureau to bureau. Some larger lenders, like credit cards and banks, provide free access to your credit score, as well.
When ordering a credit report, make sure your credit score comes with it.
Consider a Cosigner
Cosigners provide the security that lenders are looking for. A cosigner signs your auto loan with you and agrees to be responsible for payments if you can't.
The cosigner will have their credit checked, too. Your cosigner's credit score needs to be very good in order to compensate for your lower credit score.