Best bad-credit car loans January 2024 — and what to consider before applying (2024)

Our picks at a glance

Why get a car loan?

• Purchase a vehicle immediately. A car loan allows you to purchase a new or used vehicle immediately and spread the cost over several years, rather than saving funds to pay the entire cost upfront.
• Build your credit. Car loans are repaid in monthly installments, and as long as you make those payments on time, your credit scores will benefit. Taking out an auto loan can also improve your credit mix if you don’t already have one.
• Get a lower interest rate. The car you’re financing acts as collateral for the loan. Since the risk to the lender is reduced, auto loans tend to have lower rates than unsecured loans. But remember that your lender can repossess your car if you fail to repay the loan as agreed.
• Own your car. If you’re deciding between leasing or buying a car, using an auto loan to purchase a vehicle means that you’ll own it at the end of the loan term. When you own the car outright, you can sell it to recoup some of your costs and use the money as a down payment on your next vehicle.

How do bad credit car loans work?

The average used vehicle cost more than $26,000 in November 2023, according to Kelley Blue Book. Since most consumers don’t have enough savings to make a purchase that large in cash, auto lenders provide financing upfront and consumers repay the debt in monthly installments over a fixed term. Most auto loans have repayment terms between one and seven years.

In most cases, a car loan is secured, meaning the vehicle you purchase serves as collateral for the loan. If you miss your payments, the lender can repossess and sell it to recover their money.

A bad credit car loan has more flexible credit requirements and is available to borrowers with credit scores in the mid-600s or below. In fact, poor-credit borrowers (scores below 601) accounted for 14% of all auto financing in the third quarter of 2023, according to Experian.

In addition to reviewing your credit scores and history, bad credit lenders may consider alternative credit data (like your employment, education or payment history) and allow you to apply with a creditworthy cosigner or co-borrower. (A cosigner puts their credit on the line to help you qualify, but unlike a co-borrower, doesn’t share ownership of the car.)

However, you’re unlikely to qualify for a lender’s lowest rates if your credit scores are low.Although you can find auto financing at dealerships, you’re likely better off shopping for a loan on your own before visiting the car lot. By shopping around and getting quotes from credit unions, banks and online lenders, you may qualify for a better deal.

Average auto loan rates by credit score

Lenders review your credit scores to understand how much risk you present as a borrower. As a result, auto loan rates vary by credit score, with the lowest rates going to borrowers with the highest scores.

Receiving a higher interest rate can cause you to pay thousands more over the life of the loan.

Example: Let’s say two borrowers applied for $20,000 used car loans with five-year terms. One borrower has a super prime score, while the other is in the deep subprime category.

Due to the higher APR, the borrower with deep subprime credit would pay about $8,500 more over the life of the loan.

Where to find bad credit car loans

• Banks: If you have an established relationship with a bank, it may be more willing to review your account history in addition to your credit history and offer you an auto loan.
• Credit unions: The National Credit Union Association mandates that all federal credit unions must cap their interest rates at 18%, so you may find lower APRs with a credit union than other lenders. Plus, credit unions tend to have looser eligibility requirements or offer second-chance loan programs, so it’s no surprise that our top three bad credit auto loans are from credit unions.
• Online lenders: Borrowers from all over the country can apply with online lenders, which often have fast approval timelines and fewer fees. Some online lenders, like Carvana, only offer financing for their own fleet of vehicles.
• Dealership financing: If convenience is key, getting your auto loan in the same place as your vehicle may be worth considering. When you visit the dealership, the finance department can present loan offers from its partner lenders. However, dealership financing is often more expensive and there’s no guarantee that they’ll present you with the best offer you qualify for.
• Buy here, pay here dealers: These dealers specialize in low-cost, older used vehicles and have catchy slogans like, “No credit? No problem!” Buy here, pay here dealers may be appealing since they offer bad credit car loans with guaranteed approval and no credit check, but they should be avoided. They charge sky-high rates, often require weekly payments, typically don’t report on-time payments to the credit bureaus and are likely to install a tracking device with a remote kill switch on your car.

Pros and cons of bad credit car loans

Car loans for borrowers with bad credit allow you to buy a new or used vehicle immediately and spread the cost over several years. With most lenders, you can apply online in minutes and may receive a decision right away. Funding can happen the same or next business day in many cases.

However, applying for a car loan with poor credit can be tricky. Borrowers with lower scores will typically qualify for loans with higher rates. Or, if your credit scores are too low, you may need to add a cosigner to your application or make a larger down payment to qualify.

Although there are reputable lenders that offer auto financing to borrowers with poor credit scores, the bad-credit auto market is full of bad actors. Avoid predatory lenders that charge triple-digit APRs, pressure you to act quickly or aren’t transparent about the terms of your loan agreement.

How to get an auto loan with bad credit

1. Check your credit scores

Lenders will consider your credit scores and review your credit reports to make a loan decision and set your interest rate. Before applying, check your credit to get an idea of which lenders are most likely to be a good match.

Your credit card issuer or financial institution may offer free access to your credit scores (or you can pay a third-party service), and you can get free weekly access to your credit reports from all three bureaus at AnnualCreditReport.com.

2. Determine your budget

When thinking about how much you can afford to spend on a car, remember that your car payment is only part of your overall transportation expenses. Make sure you consider the following costs:

• Purchase price: The sales price of the car is the largest expense, and car prices have been high since the COVID-19 pandemic. The average sales price of used vehicles was $26,533 in November 2023, while new cars averaged $47,936, according to Kelley Blue Book. It’s possible to find vehicles for less, but you may have to do some extra research.
• Taxes, title and fees: Besides the purchase price, you must pay sales tax and registration, title and tag fees. Depending on the value of the car you’re buying and your location, these expenses can add hundreds or even thousands of dollars to your overall cost.
• Insurance: Most states require drivers to carry auto insurance, and lenders may have their own requirements about how much coverage is needed. The average annual cost of full-coverage car insurance was $2,026 in January 2024, while the average price for drivers with poor credit was $3,847, according to data from Quadrant Information Services.
• Maintenance: On average, maintenance costs 10 cents per mile, according to AAA. If you drive 10,000 miles per year, you should expect to pay about $983 per year on maintenance.
• Gas: Unless you purchase an electric vehicle, gas can be a significant expense. Consumers spent an average of $3,120 a year on fuel in 2022, according to the Bureau of Labor Statistics.

The average cost to own and operate a new car is $12,182, according to a 2023 report from AAA. A used vehicle may be less expensive, but you’ll still have to account for insurance, maintenance costs and fuel. Generally, experts recommend spending no more than 10% of your monthly income on transportation-related expenses, including auto loan payments, gas and maintenance.

3. Gather necessary documents

To apply for a car loan, you’ll need the following information and documents:

• Social Security number or Individual Taxpayer Identification number
• Date of birth
• Current mailing address
• Current employer details
• Proof of income, such as recent pay stubs or tax returns
• A copy of recent bank statements
• Your driver’s license
• Proof of car insurance

4. Compare multiple loan offers

Don’t apply for a loan with the first lender you see; rates, terms and eligibility requirements can vary significantly between lenders, so it pays to shop around.

Many lenders have pre-qualification tools that allow you to view your loan options without affecting your credit. But others require a hard credit check, which can temporarily drop your scores by about five points.

If you need to undergo hard credit checks, try to limit new credit inquiries. Multiple credit pulls for an auto loan are treated as a single inquiry as long as they occur within a 14-day “rate shopping” window.

When comparing loan offers, pay attention to the loan rates, fees, repayment length and down payment requirements to find the best deal. Use an auto loan calculator (like Calculator.net’s) to see how each loan offer fits into your budget.

Example: Suppose you received rate quotes from three lenders for a $25,000 used car loan. Consider how the APRs and repayment terms impact your monthly payment and total cost, and decide whether you want to prioritize low monthly dues or overall savings.

Loan 3 will have the lowest monthly payment but will cost significantly more money overall. If you can afford the higher monthly payment, the shortest loan term (Loan 2) typically results in the lowest overall cost of borrowing.

5. Submit an application

Once you find the right loan, complete a full loan application, supply the requested verification documents and consent to a credit check. If your application is approved, you’ll receive a preapproval letter that you can take to the dealership to finalize your deal. (For private-party loans, you may receive a check made payable to the seller, or loan funds could be deposited in your account and you’ll then use them to pay the seller directly.)

How to improve your chances of loan approval

• Boost your credit scores. If you can, delay your car purchase until you can improve your credit scores. Make all your monthly payments on time, pay down the balances on your credit cards and limit new inquiries. If your credit reports contain errors, dispute them with the reporting bureaus. The change won’t happen overnight, but with persistence and time, you can improve your credit and increase your odds of qualifying for a loan and at a lower interest rate.
• Apply with a cosigner or co-borrower. Adding someone with good credit and a steady source of income to your loan application decreases the lender’s risk and increases your odds of approval or snagging a low rate. Remember that your cosigner or co-borrower will be responsible for repaying the debt if you default — to avoid damaging your relationship (and their credit), be sure you can make payments as agreed.
• Make a large down payment. If you have extra funds, making a larger upfront payment will not only decrease the size of your loan but also give you more equity in the car, both of which make you less risky as a borrower in the eyes of lenders.
• Consider buying a car with cash. Although it may not be a realistic option for all, purchasing a car with cash is the best way to avoid costly interest fees. If you buy a basic, inexpensive car with money from your savings rather than getting a loan, you can work on improving your credit so you can qualify for a car loan (and a nicer vehicle) later.
• Choose a shorter loan term. Lenders consider longer loan terms to pose a higher risk of default because there’s more time for your financial circ*mstances to change. In general, shorter loan terms give you the best chance of qualifying for a loan, so opt for the shortest term you can afford. This strategy comes with the added benefit of reducing your total cost of borrowing.

Methodology

In many areas of the country, a vehicle is a must-have. Even borrowers with bad credit need a reliable way to get to work or school, so we’ve identified the top five lenders for bad credit car loans. Our editorial team created a rubric to evaluate 15 leading lenders and seven popular aggregators (online marketplaces that match borrowers with lenders). Then, our data research team gathered over 700 data points and scored the lenders across the following four categories to elicit a five-star rating. The five lenders listed above received the highest scores across each of the 33 loan features under consideration.

Loan cost (30%)

Many borrowers cite cost as the most important factor when borrowing money. With that in mind, we awarded points to lenders that offer the lowest interest rates (including competitive rates at the top end of their range), fewer fees and more opportunities for rate discounts.

Loan details (25%)

Here, we took a deep dive into each lender’s auto loan product, considering features like:

• Repayment term options
• Loan amounts offered
• Availability of private-party loans
• Funding timeline

Lenders with the widest variety of options and the fastest funding rated well.

Accessibility (35%)

For bad-credit borrowers, finding an auto lender that accepts low credit scores is top of mind. We heavily favored lenders that have low minimum credit score requirements (or no minimum at all), as well as those that allow cosigners and co-borrowers, offer pre-qualification and are available nationwide.

Customer service (10%)

After closing your auto loan, you want a lender that makes repayment easy and offers robust customer support. In this category, we aimed to capture the quality of each lender’s customer service by reviewing consumer reviews from independent organizations like Trustpilot, the Better Business Bureau and the Consumer Finance Protection Bureau. We also considered factors like customer service hours and whether the lender offers a mobile app.

What didn’t make the cut

We researched and reviewed 22 auto lenders before narrowing our list to the five best. Here’s a look at a few popular options that didn’t quite pass muster:

• Capital One and Ally Bank don’t disclose many details about their loans, including APR or eligibility requirements.
• Digital Federal Credit Union and CarMax could improve their customer service track records.
• America First Credit Union has a high minimum credit score requirement.
• PenFed Credit Union and A+ Federal Credit Union don’t offer private-party loans.