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Buying a car with bad credit isn't always easy to do, but you may not have many other options. Getting approved for a loan could be challenging, and if you are approved, you'll likely have a high interest rate that could make monthly payments difficult to manage.
To better position yourself to buy a car, you can take steps to improve your credit, buy a car with cash or look for a more affordable used car.
Should You Buy a Car With Bad Credit?
Whether you should buy a car with bad credit comes down to your immediate needs and your financial situation. Bad credit doesn't necessarily mean a car purchase is out of the question, but it can severely limit your options. For instance, buying a brand-new car with a small down payment could be prohibitively expensive. Alternatives exist, though. Here are some of them:
Buying a Car With Cash
You might consider coming up with enough cash to buy a car outright so you don't need a loan. In the second quarter of 2023, the average loan for a new car was $40,657, according to Experian's State of the Automotive Finance Market Report, while the average loan for a used car was $26,863. With average used car loan interest rates topping 20% for buyers with poor credit, taking out a loan may not be an affordable option.
Buying a Used Car
Used cars generally are cheaper than new cars. In the second quarter of 2023, the average loan amount for a used car was $26,863, compared with $40,657 for a new car, according to Experian data. Keep in mind that the inventory of used cars under $10,000 tends to be tighter than the inventory for higher-priced used cars.
Getting a Cosigner
A cosigner with solid income and credit, such as a parent or friend, can help you improve your odds of qualifying for a car loan if you have bad credit. A cosigner promises to make loan payments if you're unable to, which reduces risk to the lender. Your name and the cosigner's name would appear on the loan, but you would be the sole owner.
Putting Off a Car Purchase
If you don't need to buy a car right away, consider delaying the purchase until you've improved your credit. This can boost the odds of qualifying for an auto loan with good terms, such as a lower interest rate.
Relying on Other Transportation Methods
You might decide that your bad credit is too big of an obstacle to buying a car, at least for now. If this is the case, you may be able to get around by walking, cycling, riding a bus or the subway, using a rideshare service, or hitching rides from friends and relatives.
What Is Considered Bad Credit When Buying a Car?
There's no specific credit score that tells a car buyer that they've got bad credit. Credit requirements vary from lender to lender. Nonetheless, a higher credit score generally improves the chances of financing a car.
Aside from looking at your regular credit score, a lender might look at your auto-specific credit score when it's considering your application for an auto loan. Traditional credit scores from FICO and VantageScore® range from 300 to 850. Within this range, a FICO® Score☉ under 580 is considered poor. Lenders may alternatively use the FICO Auto Score, which ranges from 250 to 900.
In addition to checking your credit score, an auto lender will review factors such as your income, payment history and current debts.
What to Avoid When Buying a Car With Bad Credit
When you're buying a car with bad credit, you should watch out for situations that might steer you in the wrong direction. Here are a few of them.
Overlooking the Interest Rate
The interest rate on an auto loan is a key factor in determining how much you ultimately pay for your car. For example, a 60-month, $25,000 car loan with a 12% interest rate would wind up costing $33,367. By comparison, a 60-month, $25,000 car loan with a 20% interest rate would amount to $39,741.
To estimate how much you might pay for a car, use Experian's car payment calculator.
Doing Business With a Buy Here, Pay Here Dealership
A buy here, pay here dealership not only sells you a car but finances it too. These dealerships cater to people with bad credit or no credit at all. While this might sound like an attractive option, these dealerships often charge higher interest rates for loans and require hefty down payments.
Agreeing to a Longer Loan Period
Sure, lengthening the payoff period for a car loan can reduce your monthly payments—something that the financing office at a dealership might try to talk you into. But over time, this could mean you pay a lot more for your car.
For example, the monthly payment for a $20,000 car loan with a 15% interest rate and a 48-month payoff period would work out to $556.61. All told, the payments would add up to $26,718.
While the same loan with an 84-month payoff period would result in a monthly payment of $385.94, the total you'd have paid at the end of the loan would be $32,419.
Not Understanding the Deal
Are you confused by the language in the sale contract? Many of us are. If that's you, don't be afraid to ask questions. And if a dealership gives the runaround, walk away and head to one of its competitors.
Failing to Negotiate
When you're shopping for a car, don't forget to negotiate. The dealership may be willing to throw in some extras at no additional cost, for example, or might agree to your counteroffer. Keep in mind that you can use a lower offer from one dealership as leverage to score an even better deal at a dealership down the road.
How to Improve Your Credit Before Buying a Car
If you're shopping for a car, don't let your bad credit get you down. You can do a number of things to improve your credit before you purchase a car, such as:
- Reduce your credit card balances. Decreasing your credit card balances can help lower your credit utilization ratio. The amount of available debt you're using makes up 30% of the FICO® Score.
- Avoid applications for new credit. New credit represents 10% of a FICO® Score. Research shows that opening several credit accounts over a short period of time may make you a riskier borrower in the eyes of a lender.
- Consider a credit-builder loan. Credit-builder loans are short-term, low-dollar loans that are designed to help you establish a track record of making on-time payments. Payment history makes up 35% of a FICO® Score. Make sure your lender reports your payment activity to all three credit bureaus.
- Keep up with on-time payments. Payment history is a primary factor when it comes to calculating your credit score.
- Become an authorized user on someone's credit card. Being added as an authorized user on a relative's or friend's credit card with a good credit history might help beef up your credit.
- Sign up for Experian Boost®ø. Connecting your bank accounts to Experian Boost can give you credit for on-time payments of cellphone service, utilities, streaming services and rent.
Driving Toward a Car Purchase With Bad Credit
It can be frustrating to buy a car if you've got bad credit. But you can ease that frustration in a number of ways, such as paying for a car in cash, purchasing a lower-cost used car, adding a cosigner to a car loan, or taking some time to improve your credit. No matter which road you take, it's always smart to review your Experian credit report—at no cost to you.