How to Get a Car Loan with Bad Credit

5 min readMar 3, 2020

Many of us can’t afford to buy a vehicle outright, which is why dealerships offer auto financing. If you have good credit, securing a car loan is a rather simple process. However, if your credit is less than stellar, your chances of securing a car loan may feel slim to none.

People with bad credit often receive extremely high-interest rates, or their applications are denied entirely. We believe that this shouldn’t always be the case, since credit scores never tell the full story of what a person’s financial situation is. Life is unpredictable, and we often find that lower credit scores are not caused by poor choices. Many times, they are caused by a lack of understanding on how credit actually works.

When you find the right lender, you can get approved for a car loan, no matter what your credit score is. You can then use that loan to improve your score further for future purchases. Below, Good Fellow’s Auto Wholesalers has created a guide on how to secure a car loan with bad credit.

How Do Car Loans Work?

When you take on a car loan, you are using a lender’s money to make your purchase. This is also known as the principal, and it needs to be paid back. In exchange for using their money, the lender also expect you to compensate them by paying them interest on top of the initial loan amount. These payments are often made in monthly or bi-weekly installments to the lender over a certain period of time (also known as the loan term).

How Does My Credit Impact My Loan?

Would you lend money to anyone? Of course not, and neither will lenders. Since your credit score reflects your ability to pay off loans in the past, lenders use it to determine how likely you are to pay back future debts. When you have bad credit, you pose a greater risk to the lender. Therefore, they expect to receive higher compensation for lending the money through charging a higher interest rate — and that’s only if they accept your application at all.

It’s also important to note that anytime you apply for a loan, a hard inquiry is made on your credit file. Most people shop around before deciding, and hard inquiries are a regular part of the loan approval process. However, they also negatively impact your score. To avoid damaging your credit score while seeking, its best for all your hard inquiries to be made within a one or two-week period. Whenever they are made in that short of a time frame, they are combined into a single hard inquiry.

What Else Affects the Overall Cost of My Loan?

In addition to your credit score, lenders will also look at other factors to determine whether to lend to you and at what cost. Some of these factors include your size of down payment, the length of loan term, and the age/cost of the vehicle you are interested in. There are also monthly income requirements for a car loan.

How Can I Purchase a Vehicle With Bad Credit?

Based on this information, it may seem impossible to buy a vehicle with bad credit. However, that couldn’t be farther from the truth. Although bad credit makes getting approved for a car loan more difficult, it’s still possible. Here are some tips on how to get approved with bad credit:

Try getting approved before shopping for your vehicle. This will help you set a realistic budget long before you start your search.
Although you may want the newest vehicle on the market, we also recommend limiting your budget. Cars that are likely to keep most of their value have a higher chance of being approved for a loan. Since new vehicles can lose up to 20% of their value just by being driven off a car lot, you should always purchase used.
If you can make a larger down payment on the vehicle, you are also more likely to be approved for a higher amount.
Find a lender who is known for providing bad credit car loans, such as Good Fellow’s Auto Wholesalers. They have plenty of experience helping people in situations that are similar to yours. They also often have access to special programs for car buyers with bad credit scores.

Do I Have to Make a Down Payment?

A down payment shows lenders that you are serious about paying back the money you owe. It also gives them some protection should you be unable to repay. As a result, by putting more money down, you could make your monthly payment significantly cheaper. This type of payment is also typically required by dealerships, unless you have a high credit score.

However, if there is someone in your life with good credit who is willing to co-sign on your loan (such as a parent), you can sometimes be approved while also putting $0 down. For this to happen, the car chosen typically must be considered affordable. The year and mileage will also be considered before the lender decides whether to approve the loan or not.

How Can I Improve My Credit?

If you are not in a rush to purchase a vehicle, it is always a good idea to improve your credit score as much as possible before applying for a loan. Here are a few tips on improving your credit score

Since your payment history is the most important factor in determining your score, make sure you always make payments on time. This includes paying off your credit card and local utility bills, such as your phone service or rent.
The longer you have a credit account open, the more your score will improve (if you’re also paying off what you owe).
Be sure to never skip a payment, or at the very least, make the minimum even if you can’t pay the full amount.
Try to limit the amount of credit you use to 35% of your total available credit or less.
Limit the number of hard inquiries made on your account, which means keeping the number of times you apply for credit to a minimum.

All of these steps will show lenders that they can trust you to handle greater loans, which means a higher likelihood of you being approved in the future.

Using a Car Loan to Fix Your Credit

A great way to improve your credit score is by taking on different types of credit, such as a credit card, mortgage, or even a car loan. This is called your credit mix, and lenders use it to see if you can manage different types of credit counts responsibly over a long period of time.

When you first take a car loan, your credit score will drop a small amount. However, by paying your car payments on time, your score will soon increase.