You can get a car loan with bad credit, but you will pay more for it
A bad credit score does not lock you out of car loans. Lenders exist specifically for people with credit scores below 620, and some will lend to scores in the 500s. The trade-off is real: you will pay a higher interest rate than someone with good credit, sometimes 2 to 10 percentage points higher. On a $20,000 loan, that difference adds thousands to what you owe over the life of the loan. You also may need a larger down payment, a co-signer, or proof of steady income.
The path forward depends on what caused your bad credit. If you have recent late payments or collections, lenders see you as higher risk and charge accordingly. If your score is low because you have little credit history, you have more options. Either way, the process is straightforward: find a lender willing to work with your score, gather the documents they ask for, and understand the actual cost before you sign.
Key Takeaways
- Bad credit loans exist through credit unions, online lenders, and some traditional banks, though interest rates will be significantly higher than for borrowers with good credit.
- Your down payment, income, and employment history matter more to bad credit lenders than they do to traditional banks, because your credit report tells them less.
- A co-signer with better credit can lower your interest rate, but they become legally responsible for the full loan if you stop paying.
- The interest rate you are offered depends on your specific score, income, and the vehicle's age and value — always compare offers from at least two lenders before signing.
- Buying a used car instead of new, and putting down 10 to 20 percent, makes approval more likely and reduces how much interest you pay overall.
Where bad credit car loans actually come from
Three types of lenders will work with bad credit: credit unions, online lenders, and some traditional banks. Credit unions often have the lowest rates for bad credit borrowers because they are member-owned and can afford to take longer-term views of risk. You need to be a member to borrow, which usually means opening a savings account with a small deposit. Online lenders like LendingClub, Upstart, and Elevate approve quickly and fund within days, but their rates are higher. Traditional banks like Wells Fargo and Chase have bad credit programs, though approval is less certain and the process is slower.
Dealership financing is another route. The dealer arranges the loan through a lender on your behalf, which sounds convenient but often costs more. Dealers mark up the interest rate and take a cut, so the rate you end up with is higher than if you had gone directly to a lender. Dealership financing makes sense only if you cannot get approved elsewhere or if the dealer is offering a special promotion (which is rare for bad credit buyers).
Start by checking what your own bank or credit union offers. If you have been a customer for years, they may work with you even with a low score. If not, call a few credit unions in your area and ask about their bad credit auto loan program. Then get quotes from two or three online lenders. Do not explore to every lender you find — each process creates a hard inquiry that temporarily lowers your score. Gather quotes within a two-week window so the inquiries count as a single search in the credit scoring system.
What lenders actually look at when your credit is bad
When your credit score is low, lenders shift their focus. They care less about your payment history (which is already reflected in your score) and more about whether you can actually afford the payment right now. They want to see steady income, ideally from the same employer for at least two years. They want to know your debt-to-income ratio — how much you already owe each month compared to what you earn. They want proof that you have a job and a place to live.
Bring recent pay stubs (usually the last two months), a recent tax return or W-2, and a bank statement showing you have money in the account. Some lenders ask for proof of residence like a utility bill or lease. If you are self-employed, expect to provide two years of tax returns and possibly a profit-and-loss statement. The lender is trying to answer one question: if this person stops paying, can they actually afford the payment, or are they already stretched too thin?
Your down payment matters more with bad credit. A larger down payment (10 to 20 percent instead of 5 percent) signals that you have skin in the game and reduces the lender's risk. It also means you borrow less, so you pay less interest overall. If you have $3,000 saved and are looking at a $15,000 car, that 20 percent down payment makes approval much more likely than if you tried to finance the full amount.
How interest rates work and what yours might be
Your interest rate is the percentage of the loan amount you pay annually to borrow the money. On a $15,000 loan at 8 percent interest over five years, you pay about $3,300 in interest. At 15 percent, you pay about $6,500. That difference is real money that comes out of your pocket.
Bad credit rates vary widely depending on your exact score, income, the vehicle, and the lender. A score of 580 might get you 12 to 18 percent. A score of 620 might get you 8 to 12 percent. These are rough ranges — your actual rate depends on the full picture. The lender will give you a rate quote before you commit, and you should always ask what rate you are being offered and why. If one lender quotes you 15 percent and another quotes 10 percent, that is a $1,500 difference on a $15,000 loan.
The loan term (how many years you have to pay it back) also affects your monthly payment and total interest. A five-year loan has a lower monthly payment than a three-year loan, but you pay more interest overall. A seven-year loan spreads the payment even thinner but costs even more in interest. Most bad credit lenders offer terms between three and seven years. Calculate the total amount you will pay, not just the monthly payment, before you decide.
Using a co-signer to lower your rate
A co-signer is someone with better credit who agrees to be legally responsible for the loan if you do not pay. Lenders often offer lower rates when a co-signer is involved because they have a second person to pursue if the loan goes bad. A co-signer with a score above 650 can sometimes lower your rate by 2 to 5 percentage points.
The catch is real: if you miss a payment, the lender contacts the co-signer. If you default, the co-signer's credit is damaged too, and they can be sued for the full remaining balance. This is not a favor to ask lightly. A parent or spouse might be willing; a friend usually should not be. Make sure whoever co-signs understands the risk and is comfortable with it.
If you do use a co-signer, make sure the lender reports the loan to the credit bureaus in both your names. Some lenders report only to the primary borrower, which means the co-signer gets no credit benefit for helping you. Ask before you sign the paperwork.
Choosing between a new car and a used car
A used car is almost always the better choice when you have bad credit. New cars depreciate sharply in the first year, so you owe more than the car is worth almost when ready. If you default, the lender sells the car at auction and recovers less than they lent you. Used cars hold value better, so the lender's risk is lower and they are more willing to lend.
Lenders also have age limits on used cars — most will not finance anything older than 10 to 15 years, depending on the mileage. A 2015 model is usually fine; a 2005 model may not be. Ask the lender what age range they will finance before you start shopping.
Buy a car you can afford to maintain. A cheap car with high mileage might have expensive repairs coming. A slightly more expensive car in better condition costs less over time. Get a pre-purchase inspection from a mechanic you trust before you commit. A $150 inspection can save you thousands in hidden repairs.
The actual steps to take
First, check your credit report at annualcreditreport.com (the only free, official source). Look for errors — a late payment that was not yours, an account you did not open, a collection that was already paid. Dispute errors with the credit bureau. Fixing errors can raise your score by 10 to 50 points, which can lower your interest rate.
Second, decide how much you can afford to put down and how much monthly payment you can handle. Use an online calculator to see what different loan amounts and rates mean for your monthly payment. A $15,000 loan at 12 percent over five years is about $333 per month. At 18 percent, it is about $370. Make sure the payment fits your budget.
Third, gather your documents: recent pay stubs, tax return, bank statement, proof of residence, and your driver's license. Have these ready before you contact lenders.
Fourth, get rate quotes from at least two lenders. Tell each one the same information so the quotes are comparable. Write down the rate, term, monthly payment, and total amount you will pay. Compare the total cost, not just the monthly payment.
Fifth, once you have chosen a lender, you can shop for a car. Some lenders require you to pick a specific car before they fund the loan; others will pre-approve you for an amount and let you shop. Ask which applies to your lender. When you find a car, the lender will verify its value and condition before funding.
What usually goes wrong and how to avoid it
The most common mistake is focusing only on the monthly payment and ignoring the total cost. A dealer or lender might offer to stretch your loan to seven years so the payment is lower, but you end up paying thousands more in interest. Always calculate the total.
The second mistake is explore to too many lenders at once. Each process creates a hard inquiry that lowers your score slightly. Multiple inquiries in a short time signal desperation to lenders and can result in higher rates. Stick to two or three lenders, explore within a two-week window, and stop.
The third mistake is buying a car you cannot afford to maintain. A cheap used car might need $2,000 in repairs in the first year. Budget for maintenance and repairs, not just the loan payment.
The fourth mistake is not reading the loan agreement before signing. Make sure the interest rate, term, and monthly payment match what you were quoted. Make sure there are no prepayment penalties if you want to pay off the loan early. Make sure you understand what happens if you miss a payment.
Frequently Asked Questions
Will getting a car loan help my credit score?
Yes, if you make payments on time. An auto loan is installment credit, which is different from credit card debt and helps show lenders you can manage different types of borrowing. Each on-time payment reports to the credit bureaus and gradually raises your score. Missing even one payment damages it significantly, so treat this loan as a priority payment.
What if I cannot get approved even with a co-signer?
Some lenders specialize in extremely bad credit or recent bankruptcy. Credit unions often have more flexible standards than banks. You might also consider a smaller, older car with a lower price tag, which reduces the lender's risk. If you have time, paying down other debts or building a larger down payment can improve your chances.
Can I refinance the loan later if my credit improves?
Yes. Once your score improves (usually after 12 to 24 months of on-time payments), you can refinance with a different lender at a lower rate. This saves you money on interest for the remaining term. Ask your current lender whether there is a prepayment penalty before you refinance, though most auto loans allow it.
What is the difference between a bad credit loan and a subprime loan?
They are the same thing. "Subprime" is the industry term for loans to borrowers with credit scores below 620. "Bad credit loan" is the consumer-friendly version. Both describe the same product: a loan at a higher interest rate to offset the lender's higher risk.
Should I buy from a buy-here-pay-here dealer?
Buy-here-pay-here dealers sell used cars and finance them directly, often to people who cannot get loans elsewhere. The interest rates are extremely high (often 18 to 29 percent), and you make payments directly to the dealer, sometimes weekly. These dealers also often install GPS trackers and starter interrupt devices that disable the car if you miss a payment. Explore traditional lenders first; use buy-here-pay-here only if you have exhausted other options.