What Is Bad Credit and How Does It Affect Car Loans?
Bad credit generally means a FICO score below 600, which falls into the "subprime" category for auto lenders. Some lenders work with scores as low as 500, and a few even accept 300 or below, though these are rare and come with very high rates. Your credit score is just one piece of the puzzle—lenders also weigh your income, employment history, debt-to-income ratio, and your down payment.
A lower credit score signals higher risk to lenders, so they charge higher interest rates to offset that risk. This means you’ll pay significantly more over the life of the loan compared to someone with prime credit.
- A credit score below 600 is generally considered subprime for auto loans.
- Lenders may require a larger down payment or a co-signer to offset risk.
Sources: Bankrate, RateGenius, Consumer Financial Protection Bureau, Indiana Members Credit Union
The Subprime Auto Loan Market: What to Expect
Subprime auto loans are designed for borrowers with credit scores roughly between 580 and 619, though the range varies by lender. These loans are secured by the vehicle itself, meaning if you default, the lender can repossess the car. Because subprime borrowers are considered higher risk, rates are elevated, and some loans include prepayment penalties or other fees.
Buy-here-pay-here (BHPH) dealerships constitute a significant segment of the subprime market. These dealerships finance in-house, often at higher rates, and they may not report your on-time payments to credit bureaus—only negative activity. That can be a serious drawback if you’re hoping to rebuild credit through your car loan.
- Subprime loans are secured, so the car serves as collateral.
- BHPH dealerships may not report positive payment history to credit bureaus.
- GPS locators and starter-interrupt devices are sometimes used in subprime loan contracts, which can be invasive.
Sources: Chase, Consumer Financial Protection Bureau, Bankrate
Typical Interest Rates and Terms for Bad Credit Car Loans
Interest rates for bad-credit borrowers vary widely based on the lender, the vehicle, and your personal financial picture. Keep in mind that these are averages—your actual rate may be higher or lower depending on the lender and your overall financial profile.
Terms for subprime loans can stretch to 72 or even 84 months. A longer term lowers your monthly payment, but it also increases the total interest you pay. Be cautious with long terms: they may make the car more affordable month-to-month, but you could end up owing more than the car is worth for a longer period.
- Longer loan terms reduce monthly payments but increase total interest paid.
Sources: Experian
Steps to Improve Your Chances of Approval
While a low credit score makes approval harder, lenders also consider your income, employment history, and debt-to-income ratio. You can improve your chances by addressing these factors before you apply. Start by checking your credit report for errors and correcting them. Lenders see a larger down payment as a sign of lower risk.
Pre-qualification is a smart first step. Online lenders and many dealers offer pre-qualification with a soft credit check, which does not affect your score. This gives you an estimate of the rate and terms you might receive. Once you’re ready to apply, be aware that a formal application triggers a hard inquiry, which can temporarily lower your score by a few points. To minimize the impact, do all your rate shopping within a 14-to-45-day window; credit scoring treats multiple inquiries in that period as a single inquiry.
- Review your credit report for errors and dispute any inaccuracies.
- Get pre-qualified to see offers without harming your credit.
- Shop around within a 14-to-45-day window to compare rates.
Sources: Bankrate
Co-Signers and Joint Applications
If your credit is keeping you from qualifying for a reasonable rate, a co-signer with a strong credit history can dramatically improve your prospects. A co-signer with a credit score of 670 or higher can help you get approved and unlock a lower APR. The co-signer is legally responsible for the loan if you default, so it’s a significant commitment for them. Make sure you communicate clearly about payment expectations to protect your relationship and both of your credit scores.
A joint application is different from having a co-signer. In a joint auto loan, both borrowers are co-owners of the vehicle and equally responsible for making payments. Lenders consider both applicants' credit scores, but may use the higher score, the lower score, or a combination, depending on the lender's policy. This can be a beneficial option if both parties plan to use and pay for the car together, such as a spouse or partner. However, because both are equally liable, a missed payment affects both credit scores.
- A co-signer with good credit can strengthen your application.
- The co-signer is equally responsible for the debt.
- In a joint application, both parties share ownership and payment responsibility.
- Always have a clear plan for making payments on time.
Sources: Bankrate, Experian, RateGenius, Indiana Members Credit Union
Avoiding Predatory Lenders and Buy-Here-Pay-Here Lots
Subprime borrowers are often targets for predatory lending practices. Be cautious of lenders that offer loans with extremely high APRs or add on unnecessary fees. Buy-here-pay-here dealerships, while convenient for those with poor credit, often charge rates well above what a typical subprime borrower might get from a bank or credit union. They may also install GPS trackers or starter-interrupt devices, which can repossess your car remotely if you miss a payment. Some BHPH lots do not report on-time payments to credit bureaus, which means you won’t get credit-building benefits.
The Consumer Financial Protection Bureau (CFPB) has raised concerns about these practices, especially when they disproportionately affect vulnerable communities. Before signing, read every clause carefully. Understand the interest rate, any prepayment penalties, and what happens if you miss a payment. You have options—credit unions and online lenders often work with subprime borrowers at more reasonable rates.
- Beware of APRs that seem excessively high compared to averages.
- Check whether on-time payments are reported to credit bureaus.
- Read the fine print for prepayment penalties or hidden fees.
- Consider credit unions, which often offer lower rates and may accept scores as low as 580.
Sources: Bankrate, Consumer Financial Protection Bureau
Alternatives to Traditional Financing
If you cannot qualify for a conventional auto loan, there are alternatives. Credit unions are member-owned and often more flexible; River City Federal Credit Union, for example, typically works with applicants with FICO scores between 500 and 580. Online lenders also cater to subprime borrowers, and many allow you to pre-qualify online with a soft credit check. Some lenders specialize in bad-credit auto loans and may offer more competitive rates than a BHPH lot.
Another option is to delay your purchase and focus on improving your credit score. Even a few months of improvement can move you to a higher tier and potentially save you thousands in interest.
- Credit unions like River City FCU may accept scores in the 500–580 range.
- Online lenders offer pre-qualification and competitive rates for subprime borrowers.
- Improving your credit before buying can save significantly in interest.
Sources: Bankrate
Frequently asked questions
Can I get a car loan with a credit score under 600?
Yes, you can. Subprime lenders work with scores below 600, and some even accept scores as low as 500 or 300. However, you should expect higher interest rates and may need a larger down payment or a co-signer. According to Experian data, subprime (501–600) and deep subprime (300–500) borrowers both receive loans, though at significantly elevated APRs.
Sources: RateGenius, Bankrate, Consumer Financial Protection BureauWhat is the average APR for a subprime auto loan?
Your actual rate will depend on the lender and your financial profile.
Sources: ExperianShould I use a buy-here-pay-here dealership?
Buy-here-pay-here dealerships can be a convenient way to finance a car when other options are closed, but they come with significant drawbacks. They often charge higher interest rates, and they may not report your on-time payments to credit bureaus, so they won’t help you rebuild credit. Explore credit unions and online lenders for better terms before resorting to a BHPH lot.
Sources: Consumer Financial Protection Bureau, BankrateHow can I lower my car payment with bad credit?
To lower your car payment, aim for a longer loan term, a larger down payment, or a less expensive vehicle. A longer term spreads the cost over more months, reducing your monthly payment, but it also increases the total interest you pay. A larger down payment reduces the amount you finance, which directly lowers your payment.
Sources: ExperianWill applying for multiple car loans hurt my credit?
Applying for multiple car loans can temporarily hurt your credit because each application triggers a hard inquiry. However, credit scoring models group auto loan inquiries made within a 14-to-45-day window as a single inquiry, so you can shop around without worrying about multiple hits. The best strategy is to do all your rate shopping within that window, compare offers, and then proceed with the best one.
Sources: BankrateSources
- What should I know before I shop for a car or auto loan? — Consumer Financial Protection Bureau
- Negative Equity in Auto Lending — Consumer Financial Protection Bureau
- Pros and cons of having a cosigner for a car loan — Bankrate
- Joint vs. Cosigned Auto Loans: What's the Difference? — RateGenius
- How Credit Scores Work With a Car Loan Co-Signer — Indiana Members Credit Union
- Pros and Cons of Having a Co-signer on a Car Loan — Chase
- Whose Credit Score Is Used on a Joint Auto Loan? — Experian