If you're one of the millions of Americans who have bad credit, it’s important to know that you still have options when trying to find money to buy a car. You’re likely to pay a lot more in interest than a borrower with good credit, but you don’t have to be stuck in a bad credit loan forever. Let’s take a look at your available financing options, and then how to get out of a bad credit car loan.
Keep in mind that when you have good credit, you have the luxury of focusing on the car first and the financing second. Unfortunately, when you have bad credit you're seen as high risk. This means you may have to discuss financing with a dealer before selecting a car so they can find a lender willing to work with you.
You may already know why it’s important to have a good credit score. But life happens, and when you need a car now but have poor credit, here are your options.
7 Ways you can buy a car with bad credit
- Your local credit union: According to Clark Howard, credit unions have more than doubled the loan approval rate in recent years for people with damaged credit. And credit unions will usually write the loans at 1.5 points below the banks and 4 points below what you'd pay at a dealership.
- Private party car loan: In other words, borrow from a friend or family member. Most people will tell you this is the quickest way to lose a friend or alienate your parents, but sometimes it’s simply the best option. Just be dead serious about paying on time. And to prove it, use documentation and include interest to make it worth their while. You’ll want to setup a promissory note to make it official.
- Find a cosigner you trust (or more importantly one that trusts you): This is similar to the last item, but not quite the same. You’ll ask a friend to put their credit on the line and cosign your loan, but you'll borrow money from the lender, not them. The catch is that if you are unable to payback the loan, you’ll damage their credit and likely your friendship.
- Use an online lender specializing in bad credit loans:
- MyAutoloan offers bad credit loans that you can take to a dealership like a cash customer.
- You may know CarsDirect because they provide online car prices, but they also handle bad credit car loans. The difference between CarsDirect and MyAutoloan is that CarsDirect starts out by putting you in touch with a local car dealer who will help you find a vehicle that fits your budget.
- Rent a car instead: If you have trouble getting a loan, consider renting a car instead (Zipcar is offering a $25 coupon). You can rent when you need it or find a long term rental program and ask for a discounted rate (a month at a time). This will cost you more in the long run (similar to leasing), but if you’re out of options it can be a good short term solution. An added benefit is that you won’t need to worry about maintenance costs or resale value.
- Pay cash: If you’re reading this post, this probably isn’t an option, but I feel obligated to mention it. Consider lowering your standards for the type of vehicle you buy. Older used cars that will get you from point A to point B and can still be found inexpensively.
- Buy Here, Pay Here used car dealerships: I recommend against these dealerships but I do want to address them. The L.A. Times describes these programs as sign, drive, default, repossess and resell. This type of used car dealer takes advantage of low income buyers and sells used cars with horrible interest rates (averaging 30%). Sticker prices are rarely negotiable and down payments are always required. To top it off, Buy Here, Pay Here car lots rarely report your payment history to the credit bureaus, resulting in no benefit to your credit score. If you’re still not convinced why you shouldn't go to a Buy Here Pay Here lot, watch this video:
Getting out of a bad credit loan
If you’re able to get a loan with poor credit, your interest rate is likely to be sky high and your car payments huge. That makes getting out of debt a challenge but you need to focus on one thing: raising your credit score. To do this, having any loan (even a bad one) and making payments on time is one of the best things you can do. Do whatever you can to suck it up and make those payments for a year or two and prove you’re credit worthy. Once your score goes up from “poor” to “fair”, you’ll have these options to get out of a bad car loan:
- Refinance: Houses aren’t the only thing you can refinance, you can get a better rate on your car loan too. Once you've established six months or more of on-time payments, you may be able to find lenders who will refinance your remaining auto loan balance at more reasonable rates. Banks who might not have touched your business before will become possibilities. Check with your credit union or an online lender that allows refinancing.
- Peer to peer loan: Did you know you can crowdsource car financing? Most peer to peer lenders won’t accept borrowers with poor credit, but if you have fair credit you can refinance your car loan through Prosper (for credit scores of 640 and above ) or Lending Club (for credit scores of 600 and above).
- Trade-in your car for another with a new loan and better interest rate.
- Pay the car off early with a line of credit. Going more in debt is usually a bad idea, unless you can pay off the car loan with debt that has a better interest rate. Just try not to extend the life of the loan and keep making regular payments for at least the same amount.
- Pay extra with each car payment: If you can afford to chip in a little extra scratch with each monthly payment, you’ll pay off the principal earlier which means less interest paid over the life of the loan and you’ll end payments sooner.
- Pay the car off early with cash. If you’re lucky enough to be able to save up a little money, consider paying off your car loan early to avoid the crazy amount of interest you’ll be paying through a bad credit loan. Paying off just a year early could save you hundreds of dollars.
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I think the absolute best way to buy a car is to pay cash. Buy a cheap junker if you have very little money and put cash equivalent to a car payment in the bank. After a few months to a couple of years you can sell the junker and upgrade. Continue that cycle until you get the car you desire.
Hi Jason, Agreed, if you can swing it, cash is one your best options.
I know some people who get a loan, and then repay it in two weeks (just to build their credit score). A pretty smart move.
Hi Rick, thanks for stopping by. That’s an interesting technique. Definitely good to pay off a high interest loan as quickly as possible.
Keeping that in mind, and talking strictly about building credit, I’m not sure I agree with that approach. Yes, you want to get out of a bad loan quickly, but not for the reason of building credit. The credit bureaus look for a continuous history of on time payments of outstanding debt. While it may seem counterintuitive, actually keeping a loan open for a longer period of time and paying it regularly will have a much better impact on credit.
Great post. I didn’t know you could refinance a car loan. I wish I had known this a couple of car loans ago. One thing to add. Once the car is paid off, take that money or at least some of it and save it for the next time you have to buy a car.
Hi Charlotte, are you working with Crystal? Nice to meet you. Yes, refinancing a car loan is a great option if you have a high interest rate loan.
A car is a huge purchase and a bad interest rate sucks. Check your credit report first to see where you stand. There are plenty of credit repair options to consider as well…
Cash is best – and so long as you’re willing to buy used… it’s feasible for practically anyone. We’ve always paid cash for our vehicles, not because of bad credit, but because we HATE monthly payments/bills.
Hi Julie, Thanks for stopping by. If you can afford to pay with cash it’s definitely the way to go….although if you do have great credit some car loans can be pretty enticing with interest rates as low as they are these days.
Paying cash is the best way to buy a car. If you need a car loan though, having a solid down payment will go a long way to getting approved for a loan.
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