Get approved for a car with bad credit

Steps to Take Before You Apply for a Car Loan With Bad Credit

Credit scores are one of the factors lenders consider when deciding whether to approve a person for a car loan. A score is considered fair or poor if it falls below 670 on the FICO® Score☉ range, which goes from 300 to 850.

You may not be eligible for all loans with a score like this—and you might pay more for the loans you are able to get—but with proper planning and research, you should be able to find a loan that works for you. Here are five things you can do to improve your chance of getting approved, and reduce how much you'll pay to borrow:

Where Can I Get a Car Loan With Bad Credit?

Before you apply for a car loan, it's important to become familiar with the various borrowing options you may have. Some lenders offer loans to those with poor credit, but others may not. Knowing how each lender works beforehand could save you time and energy in the application process. Here are the most common types of auto financing:

• Captive financing: This type of financing is organized directly through the manufacturer and kept in-house. That means not only are you buying a car from a dealership, but you also finance the loan directly through them. This type of financing is not always an option with used vehicles. These loans may also be easier to get for someone with less-than-perfect credit, as captive lenders can be forgiving and have an incentive to issue you a loan to buy their car.
• Dealer-arranged financing: In this situation, the dealer works with different lenders to find and obtain a loan for your vehicle. Once you apply, you may get several loan options from which you can pick the one with the best terms. This option could be good for someone with fair credit, as your information will be shared with several lenders at once—including at least a few that should consider applicants with imperfect histories.
• Bank or credit union: Banks and credit unions may have options for financing an auto purchase. Similar to any other loan, you would simply apply with a banker and receive a preapproval that you then take to the dealership. This loan is paid back directly to your bank or credit union back on a monthly basis. This could be a good option for people who already have an established relationship with a bank or credit union, as they may overlook blemishes in your credit history and use your experience with their institution as evidence of your creditworthiness. If you can't go into a branch, you can also apply for many bank loans online by visiting bank websites and looking for auto loans.
• Online lenders: Nowadays, online banks and fintech (financial technology) companies also offer auto loans. The process when applying for these loans typically takes place all online, and interest rates can vary widely depending on the lender. To find one of these offers, you can search generally online for auto loans, looking specifically for companies that exist completely online. You can also use a single aggregation website that allows you to use one application to receive several loan offers. Just be wary of unfamiliar companies and do your research to determine whether a lender you're considering is reputable and offering a fair deal.
• "Buy here, pay here": These dealers specialize in working with people that have no credit or poor credit. Instead of sending your loan to an outside lender, they finance the purchase of the vehicles on their lot themselves. There are many downsides to this type of financing, however, including high interest rates, high down payment requirements and a potentially limited vehicle selection.

Additional Tips for Getting a Car Loan With Bad Credit

If you need a car immediately and don't have time to improve your credit scores before applying for an auto loan, here are some alternatives that might help.

1. Get a cosigner. A cosigner is a person that agrees to apply for a loan with you, and is equally responsible for making loan payments. Cosigners typically have established good credit and give the lender peace of mind in situations where the primary applicant has less-than-perfect credit history. If you end up missing payments or defaulting, there will likely be credit consequences for both you and your cosigner.
2. Increase your down payment. The bigger your down payment, the more likely it is you'll get approved for a car loan. Down payments not only reduce the amount you have to borrow, but having some skin in the game shows lenders that you're serious about paying off your loan.
3. Choose a cheaper car. If you can't get approved for a loan, finding a less expensive car will reduce the amount you need to borrow. Even if your credit isn't good enough to land you a large auto loan, a lender may approve your application for a smaller one.
4. Look into second-chance car loans. These types of loans do exactly what they say and are meant to give people with bad credit a second chance. If you have been turned down for a conventional car loan, a second-chance lender will try to provide you with finance options you're practically guaranteed to get approved for. When choosing a second-chance car loan, be careful to pick a lender that's reputable and has a track record of positive customer experiences. These loans may be available through some credit unions and even large companies like Carvana have financing options specially designed for people with poor credit. These loans will almost certainly carry high interest rates and fees, though, so consider your options carefully.

How a Car Loan Impacts Your Credit

Getting a car loan will impact your credit, and it could ultimately help or hurt your credit depending on how you handle your repayment.

First, when you apply for an auto loan (or multiple loans if you try with several lenders), a record of your application (called a hard credit inquiry) will be listed in your reports. This shows that a lender checked your credit reports as part of the application process. This record remains in a credit report for up to two years, but might not have any impact on your scores after just a few months.

Lenders often report your payment history to one or more of the three major credit bureaus. This information will remain in your credit reports for many years, so it is important to make all your payments on time.

Payment history accounts for 35% of your FICO® Score, and missing even one payment could negatively impact your scores. Too many missed payments could also result in your car getting repossessed by the lender, which has a devastating effect on your credit.

If you make all your payments on time, this positive information will be recorded in your file and will contribute to the overall health of your payment history—helping your scores over time. If you don't know what your credit score is, you can see your FICO® Score for free through Experian.