The best places for finding auto loans with bad credit

Borrowers with less-than-perfect credit, generally FICO scores under 580, may have to do some extra work to secure auto loan approval. But if you meet the lender’s other eligibility requirements, you could be approved for a loan with lower borrowing costs.

Before settling for a high-cost loan from a bad-credit auto dealership, you should explore other options, such as banks, credit unions and online lenders.

Banks and credit unions

If you have a bank or credit union account, contact the banker to ask about financing options. Although some banks have high credit score minimums, others are more lenient. And more importantly, your bank may be willing to work with you on the strength of your relationship.

This is especially true if you have strong credit. However, while banks and credit unions tend to boast lower rates, this usually comes with the caveat of more strict acceptance requirements.

You’ll also get a personalized lending experience with a brick-and-mortar bank or credit union. You can visit a branch to speak with a banker who can assist you with your application for an auto loan.

Pros

• Leniency for established customers: Current account holders may benefit from less strict eligibility criteria.
• In-person support: A banker can speak with you face-to-face regarding your loan application.
• Potentially lower rates: Credit unions tend to offer some of the lowest rates on the market, and banks aren't far off.  

Cons

• Stricter guidelines: The minimum credit score requirements could be higher than other lenders, especially subprime dealerships.
• Not a one-stop shop: Once preapproved for financing, you must visit the dealership or find a vehicle from a private seller.
• May require in-person paperwork: You may also have to handle paperwork in-person depending on your bank's online presence.  

Online lenders

Online lenders are another viable option for getting a bad credit auto loan. Most offer online preapproval tools that let you view potential loan offers, terms and monthly payments without committing to a loan. You can also use an online lending marketplace to shop around with multiple lenders in one sitting, so you’ll know which options are best for your situation.

Either way, you can take these loan quotes to dealerships and try to negotiate a deal on a car or in-house financing. Some may offer you financing with better terms to win your business.

There are also online options that combine the car buying and financing experience into a single transaction. If you prefer a streamlined experience, consider an online platform like Carvana.

Pros

• Loan preapprovals: Some lenders offer online preapprovals that don’t impact your credit score.
• Online comparison platforms: You can also use a loan marketplace to view prospective loan offers from multiple lenders with a soft credit check.
• Fast funding timelines: With the ability to handle paperwork online, many online lenders offer same-day funding. 

Cons

• Higher average rates: Compared to banks and credit unions, online lenders tend to have higher rates.
• Unknown lenders: You will likely be met with unfamiliar lenders if you choose to use an online comparison platform.
• Customer service: Without a brick-and-mortar office, it can often be more difficult to get the help you need.

Dealerships

Two types of dealers specialize in bad credit auto loans — subprime auto lots and buy here, pay here lots. The former connects you with subprime lenders, while the latter handles financing in-house. Both should only be used as a last resort. Rates are often exorbitant.

Some lenders even install tracking devices and shut-off switches to locate and disable the vehicle if you fall behind on payments. These devices make it easier to repossess the car. And while those with poor credit may still qualify for a loan at a non-subprime lot, rates will still be steep.

Pros

• No credit check: Some bad credit auto dealers offer loans with no credit check.
• Shopping convenience: Dealerships are a one-stop shop for car buying and financing. 
• Bad credit accepted: While not always the case, dealerships may work with lenders that specialize in subprime auto financing. 

Cons

• High borrowing costs: Expect a steep interest rate, which could make your monthly auto loan payment unaffordable.
• Limited options: You’ll generally be limited to used vehicles if you get an auto loan with a bad credit dealer.
• Loan terms: You are more likely to find longer loan terms, up to 96 months, with dealership loans. This will likely leave you spending more on interest. 

Best auto loans for bad credit

Once you know where you want to get your auto loan funding, compare offers of the best car loans for bad credit to gauge what you might pay for your next car.

For bad credit borrowers, it also helps to save up for a down payment before applying — a large down payment can help increase your odds of approval. A cosigner with better credit can improve your chances of both approval and decent rates. Most importantly, don’t forget to focus on the terms of the loan you’re offered instead of the monthly payment to ensure you’re getting the best deal.

How to compare bad credit auto loans

The best auto loan for you depends on your credit and the rate you are offered. Remember to shop for more than the monthly payment and consider the all-in cost of the loan. An auto loan calculator can give you a firm grasp not only on your monthly cost but also on what you will spend overall.

Along with the available rate and term, pay attention to the funding experience. If you prefer in-person support, for example, consider shopping with banks and credit unions instead of online lenders.

What to do if your application is rejected

While it is natural to feel discouraged if your application is rejected, there are ways forward.

• Check for mistakes: In some cases, denial can occur due to errors in your application. Review your application to ensure you didn’t miss any sections or present wrong information.
• Contact the lender: Lenders are required by law to share why loans are denied. Request the reason for rejection within 60 days of applying.
• Pay down debt: Sometimes lenders will not approve borrowers with a high debt-to-income ratio. Try to get your DTI under 50 percent. Consider a debt consolidation loan to pay down multiple debts at a lower interest rate.
• Improve credit: One of the most obvious ways to improve future loan approval is to increase your credit score. Do this by checking your report, paying down debt and lowering credit utilization.

Kait Gavin, Cox Automotive’s VP of operations for F&I and titling solutions, presents simple advice for borrowers looking for a bad credit auto loan.

“Be upfront with your dealership,” she advises. “Let them know your credit situation. They can help you.”

While sharing your credit history might feel difficult, doing so upfront can help you quickly gain a better understanding of your potential rates.

Bottom line

A bad credit score doesn’t mean you must settle for an auto loan with an excessive interest rate and unaffordable monthly payment. Instead, shop around with banks, credit unions and online lenders to determine if there’s a better deal. Ultimately, the best car loan for bad credit is the one that offers you the lowest rates and most favorable terms.