There is a lot to take in when it comes to subprime car financing. To help make it digestible, we’ve broken down what a subprime auto loan is, how to get one, what types of lenders are available, and some methods to increase your chances of approval. We’ll also provide interest rates for bad credit car loans so you can know what APRs to expect when financing.
What Is a Subprime Auto Loan?
Subprime auto loans are car loans that are offered to those with bad credit scores, usually under 600, and people with limited or no credit histories. These vehicle loans typically come with the highest interest rates due to the risk a subprime borrower poses to the lender. They also can come with various fees and prepayment penalties.
Where To Get Subprime Auto Loans
Even if you have bad credit it is still possible to get a car loan. While it’s possible to get an offer when financing a car with credit scores this low, loan applicants in this range are more likely to be rejected. Borrowers sometimes have difficulty finding subprime car loans because many leading car finance companies avoid those with below-average credit.
However, due to this, a space in the market has developed for bad credit auto loan providers allowing those with poor credit the ability to finance a vehicle. There has been an increase in mostly online vehicle lenders that specialize in helping those with low credit scores. Some auto loan providers even have specific departments to help with bad credit car financing.
Below are your main options when looking for a subprime auto loan:
- Banks: Traditional banks can offer some good services for those with bad credit, but typically they have higher credit and income requirements compared to most lenders. While it may not be the best option, it is best to search around since some have few to no minimums and are willing to work with you.
- Credit Unions: Compared to banks, credit unions are much more able to get you approved for bad credit car loans. These types of financial institutions tend to come with competitive rates as well as fewer fees for financing ventures, but you must be a member.
- Online Providers: Getting an auto loan with bad credit through an online loan provider can be a convenient and easy option to apply for and get a great loan deal. Also, some of these lender marketplaces specialize in helping those with low credit scores and offer tailored services for low-credit borrowers.
- Dealers: You may be able to find luck with a dealer through their lender network if you are considering buying a new or used car with bad credit. However, out of all of the options they are the most limited in terms of services.
- Guaranteed Approval Dealerships: Through this type of lender it is possible to get approved and drive off with the car you want within the same day. While this kind of option sounds enticing, these dealers offer loans with the highest rates on the market and offer unfavorable terms along with high fees. They are also called buy here pay here dealerships, so if you hear of this type of dealer, stay away.
How To Get The Best Subprime Auto Loans
Below are our recommended best steps you should take for getting approved for an auto loan with bad credit:
1. Check Your Credit Score
Before you begin comparing your options for bad credit car loans, you should check your credit score. Typically, credit scores used by lenders include the FICO and VantageScore models which range from 300-850. This will allow you to set expectations when searching for an auto loan with bad credit and help you determine whether you are getting a good deal when comparing providers.
You should also review your credit report to check for any inaccuracies that may be lowering your score. Companies such as Experian and Equifax can provide you with a free credit report so you can make sure your credit information is correct. You can also request one credit report yearly from all credit bureaus from annualcreditreport.com.
2. Know Your Income and Outstanding Debts
Even with low credit scores lending companies will take into account your monthly income and debts to see if you can make auto loan payments. This information will be used to help determine the rates you receive, any fees associated with the loan, and the down payment they will require. Knowing both your income and your debt against each other can help gauge what you can afford and see how likely you will be to get approved for a loan.
3. Save up for a Down Payment
If you have a low credit score, a larger down payment can increase your chances of getting a car loan with bad credit. The more money you put down before beginning a bad credit car loan, the less risk the lender faces. You’ll be much more likely to be approved if you cover a significant down payment for your new vehicle, whether with money or a trade-in vehicle.
It’s recommended by financial experts that you put down a minimum of 20% of the car’s value. However, if you can’t afford this, some auto financing lenders will accept down payments as low as $1,000.
4. Determine What You Can Afford
You should consider whether you want a new or used car, and determine whether you can afford a sizable down payment and monthly payments with a bad credit score. Getting a used car is typically cheaper and can help you keep more money in your pocket. It should be noted getting a bad credit car loan for that older vehicles to tend to come with the highest interest rates, but you’ll most likely end up paying less overall.
In addition, your vehicle loan term should be considered when searching for a car loan with bad credit. Even though a longer loan term can secure lower monthly payments, you may end up paying more in interest over time. We suggest using an auto loan calculator to help you compare different loan terms and see what rates you might receive from lenders.
You should also consider more than just auto loan terms when purchasing a vehicle with bad credit. There are other costs that come with car ownership like fuel expenses, car insurance, vehicle maintenance, and taxes to take into account.
5. Apply for Loan Prequalification and Preapproval
To give you the best chance to get approved for an auto loan with bad credit, you should consider applying for prequalification and preapproval. Each method allows you to get loan offers on the spot, allowing you to compare lenders. The terms are often used interchangeably, but there are key differences. Below we will lay out what it means to prequalify and get preapproval for an auto loan:
- Prequalification: When you prequalify for vehicle financing, a lender gives you an estimate of what your interest rate could be. This method involves a soft credit check which does not include a full appraisal of your credit report. Due to this, any offers given are provisional and are not completely guaranteed.
- Preapproval: Preapproval is typically more useful since it nearly guarantees financing from a car loan company and requires a hard credit check. However, preapproval can hurt your credit score so it is best to consider this before getting an auto loan offer with this method.
6. Compare Auto Loan Providers
Comparing providers can help you find the best deals for auto loans for bad credit. Applying for any vehicle loan can be done through various banks, credit unions, online lenders, and dealerships. You have a better chance of getting approved if you focus your search on auto financing companies that specialize in bad credit car loans. Also, look for companies with low income and credit minimums to increase your chances.
Regardless of which bad credit loan provider you pick, expect to pay a relatively high annual percentage rate (APR), which is the combination of the interest rate and any added fees. However, offers will vary from many of these lenders, so make sure to apply for as many as possible so you can compare in order and get the best possible terms for your situation.
How to Get Approved for Subprime Auto Loans
Below are four tips to help you get the cheapest auto loans with bad credit:
- Look for cars you can afford: Only look for vehicles you’ll be able to pay off, as this could make you appear less risky in the eyes of auto lenders. However, while used vehicles tend to be cheaper, they typically come with higher APRs.
- Get a Loan Co-signer: Adding a co-signer to a bad credit car loan means another person promises to pay the lender if you default. Since this reduces the risk to vehicle financing providers, it makes you much more likely to find loan approval and get lower rates.
- Improve Your Credit Score: You can increase your credit score over time by reducing your debt and building a solid payment history on your credit report. The higher your credit score gets, the lower your interest rates will be for a vehicle loan.
- Consider Credit Unions: Some borrowers with bad credit find luck getting car financing through credit unions such as PenFed. This is because credit unions often have less strict credit requirements than banks.
Subprime Auto Loan Rates
Currently, average auto loan interest rates for those with subprime or deep subprime credit scores range from 11.53% to 14.08% for new cars and 18.55% to 21.32% for used vehicles. Your credit score is a major determining factor in what rates you get, and those with bad credit get the highest rates. The interest rates you get with bad credit depend mainly on how low of a score you have and whether you are financing a new or used vehicle.
Average Auto Loan Rates by Credit Score
Below is data on the average interest rates for borrowers from super prime to bad credit score ranges from Experian’s Q1 2023 State of the Automotive Finance Market report: