Auto Lenders for Bad Credit Borrowers

Who Has the Best Auto Loan Rates?

You can get an auto loan from different types of lenders, and you won't necessarily know which one will offer you the lowest interest rate until after you apply. Each lender has its own way of evaluating applicants, and your loan offer and rates could depend on your creditworthiness, the down payment, the vehicle and repayment term.

However, just as you'll be shopping for the right vehicle, you can shop around to find the best lender. You can often find auto loans from:

• Banks and credit unions: Banks and credit unions both play a large role in the auto loan financing market. You may be able to get preapproved for an auto loan online, over the phone or at a branch before you go to a dealership to purchase a vehicle.
• Dealer-arranged financing: Once you're at the dealership, a finance manager can submit your loan application to multiple lenders to see which offers you the best rates. While having the dealership arrange the financing can be convenient, the dealership might take a cut of the loan amount for the service and you could receive a slightly higher interest rate as a result.
• Online lenders: Some online financing companies offer auto loans. There are also aggregator sites that let you submit one application to get several auto loan offers.
• Captive financing lenders: Many auto manufacturers also run financing companies that offer loans to customers. Captive financing companies may offer special incentives, such as 0% APR loans, to borrowers with good to excellent credit who are purchasing a new vehicle.
• Buy here, pay here (BHPH) dealerships: A BHPH dealership directly finances auto loans rather than acting as a middleman between you and a lender. BHPH dealers often work with people who have bad credit and typically charge high interest rates. These dealers may also be more likely to repossess your vehicle when you miss a payment, sometimes even installing devices that they can use to quickly disable or find the vehicle.

To help get a sense of whether you're being offered a good rate, you can compare your loan offer to the average interest rate that other borrowers with similar credit received. Experian's State of the Automotive Finance Market for the second quarter (Q2) of 2020 breaks these down based on borrowers' credit score ranges and whether they bought or leased a new or used vehicle.

Source: Experian's State of the Automotive Finance Market, Q2 of 2020

A Few Auto Loan Options for Bad Credit

If you have poor credit, you'll be more limited in choosing a lender to work with. Here are a few options worth considering:

• A local BHPH dealership: There are big downsides to working with BHPH dealers, but they may be one of your only options if you can't get approved for a loan elsewhere. These dealerships don't necessarily advertise themselves as BHPH. Instead, they may use phrases like "no credit check" or "no credit—no problem" in their advertising.
• Auto Credit Express: Auto Credit Express isn't a lender, but it helps people who have no or bad credit get connected with lenders in the U.S. and Canada. You can submit an application online, and your information will be passed on to nearby dealers and lenders who can reach out to you with offers.
• Capital One Auto Finance: Capital One has an online prequalification application that only takes a few minutes to complete. If you're prequalified, you can take your loan offer to participating dealerships or look for a vehicle online using the Capital One Auto Navigator tool.
• Carvana: Carvana is an online car seller that inspects its vehicles before sale, delivers vehicles to your door and offers a seven-day money-back guarantee. The company also offers financing, including for buyers with bad credit, that you can prequalify for before browsing their selection.

Whether you have bad credit or excellent credit, you'll want to compare multiple offers before taking out a loan.

Tips for Getting an Auto Loan With Bad Credit

If you can hold off on your purchase, there are also things you can do to help improve your credit or your chances of getting approved and being offered a good rate:

• Get a cosigner. A creditworthy cosigner can help you qualify for better rates and terms on your car loan. But think carefully before you ask, because the person will also be legally responsible for repaying the loan if you can't. Failing to repay a cosigned loan can take a big toll on credit scores belonging to both the primary borrower and the cosigner.
• Increase your down payment. If you can swing it, a larger down payment means you won't have to borrow as much, which can make it easier to get approved for a loan.
• Purchase a less expensive vehicle. Similarly, you can reduce how much you borrow if you choose a less expensive vehicle or opt for a base model rather than fancy upgrades that drive up the cost of the car.
• Improve your credit. Paying your bills on time can help you improve your credit score, but it won't necessarily be a fast process. One of the few ways to quickly improve your credit is to pay down (or consolidate) credit card debt to lower your credit utilization ratio.
• Sign up for Experian Boost^®ø. If you haven't done so already, using Experian Boost could be a free and quick way to improve your credit. After signing up and linking an eligible bank account, you can add on-time phone, utility and Netflix^® payments to your Experian credit file. The presence of more accounts in good standing on your credit report can help improve your scores, especially if you have a "thin" credit file.

Once you're ready, shop around for an auto loan to see which lender gives you the best offer, even if you still have bad credit. However, do so strategically.

Applying for an auto loan can lead to a hard inquiry, which can hurt your credit scores temporarily. But VantageScore^® and FICO^® credit scores count hard inquiries from auto loan applications as a single inquiry if they happen within a short time period (FICO^® provides a 45-day window and VantageScore gives you 14 days). With this in mind, get everything ready and try to submit all your applications within two weeks to find your best loan offer without unduly hurting your credit.