Car Loan for Bad Credit: Should You Bite?

Bad credit can be a frustrating wall to climb over as a potential car owner. But often, owning a car isn’t optional: Transportation has been cited as the number-one barrier to employment. It’s no wonder, then, that 80% of people feel they have no choice but to buy a car.

When you have to have a car, it might make sense to get a car loan for bad credit—especially if it opens up opportunities you couldn’t get otherwise. 

A lower score means you're likely to be charged higher interest rates. That said, if you have a little breathing room, you could take steps to improve your credit score, get a good deal with smart shopping strategies, or consider a refinance down the line.

Car Loans for Bad Credit: the Math

The interest rate gap between a poor and excellent credit score is large. A car shopper with a poor credit score is likely to be offered a loan rate two or even three times higher than a shopper with an excellent score.

New cars have higher price tags, but loans for used cars often carry higher interest rates—making a low APR (annual percentage rate) especially tricky to find. Higher APRs make loans more expensive overall. It might be worth getting a car regardless, but first, consider the benefits of waiting.

If You Can Wait, You Could Save Big on Your Car Loan

When you're actively working to improve your credit score, waiting might be the better bet if you can. Waiting could boost your score into the next credit tier, improving auto loan offers. 

Say your FICO Score is close to rising from poor (300–579) to fair (580–669). You might benefit from waiting three to six months, slowly boosting your score with on-time payments. Though negative marks like bankruptcy and late payments linger on your credit report for years, their impact on your score fades, especially as you build a new positive payment history.

If you're in a hurry, changes to your credit utilization (how much of your available credit you’re using) could improve your score rapidly, tipping you into a higher bracket. Lenders only see your most recent utilization, which updates monthly. If you go from using 70% of your credit limit to using 5%, your score could rise meaningfully. This is a short-term strategy you may find useful 30-45 days before applying for a car loan.

How to Get the Best Deal When You Need a Car Right Now

These steps could help you get the best possible terms.

Shop multiple lenders

Shop three to five lenders to get the best deal, since lenders tend to offer different rates and terms. Lenders may offer you better rates because they measure risk differently. You can shop through online marketplaces, banks, credit unions, or online lenders for quotes. 

Many lenders let you prequalify online. Prequalification doesn't impact your credit score—you can prequalify as many places as you’d like. That’s a good way to find the best loans with bad credit.

Consider credit unions

Credit unions often offer loan rates one to two percentage points lower than bank rates. Many charge $5 to $25 membership fees to join, but that may be waived, depending on the terms and conditions. Credit unions may also offer smaller loans that banks won’t offer.

Make a bigger down payment

If you can afford it, a bigger down payment could meaningfully shrink your APR, monthly payments, and overall loan cost. Down payments average 10% for new cars and 20% for used. 

Choose a shorter term

As you compare rates, you’ll notice shorter terms cost more monthly, but less overall. You pay more each month for a three-year term than for a five-year on an identical loan. The reason you might opt for the shorter term anyway is that you pay less in interest overall. If the goal is a better deal on a car loan for bad credit, a shorter term might be the way to go—if it’s affordable.

Add a co-signer

Adding a co-signer to your loan could meaningfully improve your offers, especially if the co-signer has an excellent credit score. The upside: You don't need to wait until you can improve your credit, and the offers could be much better. The downside: Your co-signer is now on the hook for your loan and their credit could suffer if you don't repay it as agreed. It takes a lot of trust and communication to make a co-signing work. If you can swing it, it might be worth doing.

Avoid buy-here-pay-here loans unless there’s no other option

Some specialty dealerships offer buy-here-pay-here loans for shoppers with bad credit. The dealership asks for some basic information, like your home address and job status, and then shows you which cars you qualify for. If approved, you can sign for a car loan just like you would any other loan, except the terms are usually stricter.

The pro is that you’re more likely to be approved than at traditional dealerships. The cons? Your rate will be very high, and your selection of cars will be limited. Because this kind of financing is so expensive, it’s often seen as a method of last resort. We get it though—sometimes, a car is just necessary. It comes down to what’s necessary and affordable, and this option is there if you need it.

Refinancing Your Car Loan Remains an Option

You can refinance a car loan for bad credit. Improvements to your credit score or shifts in the broader car loan market could get you better offers in a year or two. 

A car loan doesn’t have to be a life sentence. It could bridge the gap between car and no car, and you still might get better terms later. Refinancing may also help you avoid the need for auto loan debt relief.

Indicators you might be ready for a refinance:

• It’s been at least six months since you got your car loan.

• You have at least 24 months left on your loan.

• Rates or your credit score have meaningfully improved since you got the loan.

It’s not worth betting the farm on rate improvements coming at any specific date—these things are unpredictable. But keep an eye on opportunities to refresh your loan with something better. Just make sure the money you save from a lower interest rate is more than the fees for refinancing.