Bad Credit Auto Loans: Your Options

A credit score under 600 doesn't mean you can't get a car loan. Here's how to navigate your options.

What Counts as "Bad Credit"?

For auto loans, credit scores generally fall into these categories:

If your score is below 600, you're in "subprime" territory. Loans are available, but they're expensive.

Why Bad Credit Loans Cost More

Lenders charge higher rates because:

Higher risk: Statistically, borrowers with lower scores default more often.

Fewer lenders competing: Less competition means less pressure to offer good rates.

Limited options: Borrowers with bad credit have less negotiating power.

The harsh reality: A 20% rate on a $15,000 loan costs $4,000 more than a 7% rate over 60 months.

Your Options for Bad Credit Auto Loans

Option 1: Subprime Auto Lenders

These lenders specialize in borrowers with credit challenges:

Examples:

• Capital One Auto (accepts scores 500+)
• Westlake Financial
• DriveTime
• Exeter Finance
• Auto Approve

Pros:

• Will approve low credit scores
• Some offer online pre-qualification

Cons:

• High interest rates (15-25%)
• May require larger down payment
• May have vehicle restrictions

Option 2: Credit Unions

Credit unions are often more flexible than banks:

Why they help:

• Member-focused, not profit-driven
• Consider your whole financial picture
• May have "fresh start" auto loan programs

How to access:

• Join a local credit union
• Look for ones with bad credit programs
• Build relationship before applying

Pro tip: Many credit unions let you join for a small donation to a partner charity.

Option 3: Buy Here, Pay Here (BHPH) Dealers

These dealers finance cars themselves, bypassing banks entirely.

Pros:

• Almost anyone can get approved
• No credit check in some cases
• Immediate financing

Cons:

• Extremely high rates (20-30%+)
• Limited, often older vehicle selection
• Higher vehicle prices
• Repo-heavy (they profit from repossession)

Only use BHPH if: You have absolutely no other options and need transportation immediately.

Option 4: Co-Signer

A co-signer with good credit can help you qualify for better rates.

How it works:

• Co-signer is equally responsible for the loan
• Their credit affects approval and rate
• If you don't pay, their credit is damaged too

Good candidates:

• Parents
• Spouse
• Close family members

Important: Never ask someone to co-sign if there's any chance you won't make every payment.

Option 5: Larger Down Payment

More money down reduces lender risk:

Benefits:

• Lower loan amount
• Better approval odds
• Potentially lower rate
• Less likely to be underwater

Target: 20% down or more for bad credit situations.

How to Get the Best Rate with Bad Credit

Step 1: Know Your Score

Get your actual credit score before shopping:

• Credit Karma (free)
• Your bank's app
• AnnualCreditReport.com

Knowing your score prevents surprises and helps you identify realistic options.

Step 2: Fix Easy Errors

Check your credit reports for mistakes:

• Accounts that aren't yours
• Wrong payment history
• Duplicate accounts
• Incorrect balances

Dispute errors with the credit bureaus. Fixes can take 30-45 days.

Step 3: Pay Down Existing Debt

If you have a month or two before buying:

• Pay credit cards below 30% of limits
• Don't close old accounts
• Catch up on any late payments

Step 4: Shop Multiple Lenders

Even with bad credit, rates vary significantly. Apply to:

• At least one credit union
• One or two subprime online lenders
• The dealer's network

Apply within 14 days so multiple inquiries count as one.

Step 5: Consider the Total Cost

Don't just look at monthly payment. Calculate total interest paid. A $300/month payment for 72 months costs more than $400/month for 48 months.

Red Flags to Avoid

"No Credit, No Problem!" Dealers

These often have the worst terms. They profit from desperate buyers.

Payment Packing

The dealer quotes a payment, then adds extras (warranties, insurance) without clearly disclosing them.

Yo-Yo Financing

You drive away, then get called back because "financing fell through." Now they offer worse terms. Never take the car until financing is confirmed.

GPS Trackers and Kill Switches

Some subprime lenders install devices to track or disable your car. Know if this is in your contract.

Excessive Fees

Watch for:

• Origination fees over $500
• Documentation fees over $200
• "Dealer prep" fees

Building Credit Through Your Auto Loan

A bad credit auto loan can actually improve your credit over time:

Payment history (35% of score): Every on-time payment helps.

Credit mix (10% of score): An installment loan diversifies your credit.

Average age of accounts: Keeping the loan open adds to credit history.

The plan:

1. Make every payment on time
2. Set up autopay so you never miss
3. After 12-18 months, consider refinancing at a better rate

When to Wait Instead of Buy

Consider postponing if:

Your credit can improve quickly:

• Paying off a collection could boost score 50+ points
• A bankruptcy is about to fall off your report
• You're 30 days from negative marks aging

You don't have enough down payment:

• Smaller down payment = higher rate
• More likely to be underwater

The math is terrible:

• If the only available rate is 25%+, the car will cost nearly double
• Sometimes waiting 6 months to improve credit saves thousands

Alternatives to Traditional Auto Loans

Leasing (Usually Not Available)

Most leases require 680+ credit. Not typically an option for bad credit.

Personal Loans

Unsecured personal loans can sometimes be used for cars:

• No vehicle as collateral
• Rates vary widely by credit
• Usually smaller amounts than auto loans

Save and Pay Cash

If you can wait:

• Save aggressively for 6-12 months
• Buy a reliable $5,000-$8,000 used car with cash
• Build credit separately with a secured credit card
• Finance your next car with improved credit

Sample Bad Credit Scenarios

Scenario 1: Score 580, Need Basic Transportation

Options:

• Credit union "fresh start" program
• Subprime lender with 20% down
• Older but reliable used car ($8,000-$12,000)

Expected rate: 15-20% Strategy: Make payments for 12 months, refinance when credit improves

Scenario 2: Score 520, Recent Bankruptcy

Options:

• Subprime specialist lenders
• Buy here, pay here (last resort)
• Wait 6-12 months to rebuild credit first

Expected rate: 20-25%+ Strategy: Smallest loan possible, aggressive paydown, refinance ASAP

Scenario 3: Score 620, Just Needs a Boost

Options:

• Credit unions
• Some traditional lenders
• May qualify for decent used car rates

Expected rate: 12-16% Strategy: Shop aggressively, negotiate, consider co-signer for better rate

The Bottom Line

Bad credit makes car buying harder and more expensive, but not impossible.

Your priorities:

1. Avoid predatory lenders
2. Make the smallest loan possible
3. Get the shortest term you can afford
4. Make every payment on time
5. Refinance when credit improves

Every on-time payment improves your credit. This car loan can be the first step toward better financial health.

Last updated: January 2025