How to finance a car when you have bad credit

Here’s the reality of getting a car loan: Lenders earn money by making loans. They not only want to finance cars, but they must finance cars to survive. Your goal is to find the lender that wants to finance your next vehicle by making yourself appear as “low-risk” as possible. Read on for the five keys to doing just that.

1. How do I obtain my credit score?

Your credit score is a snapshot of your creditworthiness at any given moment. It can change from week to week or month to month. If you haven’t checked it in the past six months, do so before shopping for an auto loan. It’s the first piece of information a lender considers. It serves as the best initial tool a lender uses to determine your credit status and the interest rate you qualify for. There are several legitimate online sources for obtaining your score, such as Experian’s Free Credit Score. Many credit card companies provide free credit scores to cardholders.

Credit scores for auto loans

Borrowers in Experian’s Subprime and Deep Subprime categories often have a significant ding to their credit sometime in the recent past. Subprime borrowers have credit scores of 501 to 600; the Deep Subprime category is below 500. Loans sent to collection, bankruptcy, or the repossession of a home or car can throw a borrower into one of those lower credit-score categories.

The good news is that car financing isn’t only available to those with gold-plated credit. However, lenders issued fewer car loans to those with weaker credit in 2023 than the previous year. The latest data available shows that those two categories of borrowers secured about 14% of all new and used car loans in the third quarter of 2023.

Borrowers in Experian’s Near Prime category fell back after an uptick in the last two years. These are borrowers with a credit score between 601 and 660. In the third quarter, they snagged about 17% of all new and used car loans. That portion was down from about 18.33% in 2022 and 18.61% in 2021.

Plus: 19 ways to save money on your next car

2. How do I obtain my credit report?

While a credit score is a snapshot of your current credit health, a credit report provides your credit history, including previous and active loans, and whether you pay on time. It will also show any loans that have gone into collection, bankruptcy, and repossession. Three major credit information agencies — Experian, TransUnion
TRU,
-0.17%,
and Equifax
EFX,
+0.41%
— collect information from lenders to build your report, which they supply to lenders upon request. You need to know what is in your report before a potential lender sees it. You have a right to one free report per year from each agency. Order your report and use it as a roadmap to repair any negative information.

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3. How do I raise my credit score and report?

Never take for granted that lenders have provided the three credit-reporting agencies with accurate information. They do make mistakes. Each agency has its own established procedures for disputing misinformation. If you find an error on your credit report, make a formal dispute with the reporting credit agency yourself. You must do this with each agency where the misinformation appears. They don’t talk to one another.

Take the time to do whatever you can to clean up any legitimate negative marks on your report. Pay off balances in collection, and pay all accounts to make them current. Paying your creditors on time is the best way to improve your credit score.

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4. How important is a down payment?

Anyone under financial stress will probably struggle to scrape together a decent down payment. However, the more “skin” you have in the deal, the more likely a lender will take a chance on you. A hefty down payment may even motivate the lender to charge a lower interest rate. Lending is all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you will default on the loan. Whether it’s a home mortgage or a car loan, lenders view 20% as a reasonable down payment. The better your credit, the better your chance of putting up a smaller down payment. However, if your credit is really weak, putting down more will help convince a lender you are serious about your finances. It will further improve your chances.

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5. Where can I get a car loan?

No matter how weak you believe your credit is, it might be better than you think. Before ever setting foot on a dealer’s lot, you should approach various lenders to get preapproved for a loan. Remember that finance companies are probably your best shot at securing a subprime loan. However, banks and credit unions are beginning to look more favorably on borrowers with less-than-sterling credit. Don’t rule them out in your search.

Even the lending divisions of some carmakers, such as GM Financial, are open to financing a car for those with weaker credit. You will have to apply with these carmaker-owned finance companies at the dealership. Still, shop around beforehand for a ballpark idea of the interest rate you can expect because it affects how much you can afford when buying a car.

Your last resort may be a “buy here, pay here” (BHPH) dealer. If you need to finance through a tote-your-note dealer, take a little time and find one that works with one of the credit bureaus. You will pay a much higher interest rate than through a conventional lender. So, you might as well ensure that you get credit for your on-time payments. It will make securing your next car loan easier and may earn you a lower interest rate next time. If you search buy-here-pay-here options enough, you may find a franchise car dealer making BHPH deals on used cars.

Learn more: What is a buy here, pay here car dealer? Here’s what to know about this last resort for buying a car.

This story originally ran on Autotrader.com.