The Impact of Bad Credit on Your Car Loan Interest Rates

Posted Wednesday, Jun 12, 2024

Your credit score significantly affects your ability to finance major purchases such as buying a car. The credit scoring system is used to assess an applicant’s risk and predict their ability to repay their debts.

Generally, the more credit you have, such as loans or credit card debt, the lower your credit score will be, at least if you have a history of not paying it. Car finance interest rates for bad credit are generally higher because lenders want to protect themselves from the risk of lending loans to people with a history of late payments.

In this article, we’ll explore how your credit score can impact your interest rates and how to secure the best interest rates possible in your situation.

What is Bad Credit in Car Loan?

Most people who have ever borrowed loans or signed up for credit cards will have a credit history recorded at one or more of three main credit bureaus: Equifax, Experian, and TransUnion. This credit history contains information about their debts and bill payment history to calculate their credit score, a numerical indicator that acts as a guide to their creditworthiness.

The most common credit score in the United States is the FICO Score, originally (Fair, Isaac and Company), and VantageScore. In both scoring models, a credit score below a certain threshold indicates poor credit. For FICO, a score below 580 is considered bad, while for VantageScore, a score below 601 falls into the poor or very poor credit categories.

Importance of Credit Score in Loan Approval

As already discussed, when you apply for an auto loan, lenders look at your credit history to understand your past financial behavior. If your credit history is very short or nonexistent, lenders may have very little to offer you.

Lenders also look at the amount of debt you currently have, and if you have a substantial amount of debt, they may be hesitant to offer you more credit. However, a solid payment history and not owing much money can allow you to borrow more money at lower interest rates.

It will show lenders that you are responsible for managing your debts and have a track record of making timely payments, among other factors. Both scoring models, FICO and VantageScore, consider elements such as credit utilization, payment history, and the length of your accounts, helping lenders see your financial stability over the past few years.

Understanding Credit Score Ranges and Interest Rates

Here’s the breakdown of typical credit score ranges and how they might affect interest rates.

Credit Score Range Description Interest Rates
800-850 Exceptional Lower interest rates as lenders view you as a very reliable borrower.
740-799 Very Good You’ll qualify for most loan options and get very competitive interest rates.
670-739 Good Favorable interest rates, and considered a reliable borrower by many lenders.
580-669 Fair Lenders may view you as a riskier borrower and offer higher interest rates.
Below 580 Poor May have difficulty in getting loans, might receive very high interest rates if approved.

Impact of Bad Credit on Car Loan Interest Rates

Lenders use risk-based pricing to decide on the interest rates they will offer borrowers. Your credit score and credit report provide lenders with information about how you have managed credit in the past, which is also viewed as a way to predict your future financial behavior.

When someone has poor credit, it might be because they have missed or made late payments, high amounts of debt, or have negative marks such as bankruptcy or accounts in collections. It could also simply mean that the borrower is new to credit and hasn't yet built a positive credit history yet.

While lenders have some options when a borrower can't pay, they may ultimately be required to sell the debt to a collection agency for a fraction of its value or write off the debt entirely.

To protect themselves from such potential losses, lenders usually charge higher interest rates on borrowers with lower credit scores.

Factors Influencing Interest Rates Beyond Credit Score

Loan interest rates are influenced by various factors beyond just the credit score. Here are some additional factors that can impact interest rates:

1. Loan Terms: The loan term length can affect the interest rate. Generally, longer-term loans may have higher interest rates compared to shorter-term loans.

2. Down Payment: In general, a larger down payment means a lower interest rate because lenders see a lower level of risk when you have more stake in the vehicle.

3. Loan Amount: Car buyers can pay higher interest rates on loans that are particularly large, while smaller loan amounts may result in lower interest rates.

4. Income and Debt to Income Ratio: Lenders consider your income level and debt-to-income ratio (DTI) to assess your ability to repay the loan. Lower DTI ratios and higher income levels may lead to more favorable interest rates.

5. Market Conditions: Interest rates can fluctuate based on prevailing market conditions, such as changes in the economy, inflation rates, and central bank policies.

6. Lender Policies: Each lender may have its own policies and guidelines that influence the interest rates they offer. It's a good idea to compare rates from different lenders to find the most competitive option.

How To Secure Better Interest Rates

Securing a good interest rate with bad credit can be challenging, but there are definitely some steps you can take to improve your chances. Here are some strategies:

Increase Your Credit Score

When applying for a car loan, having a higher credit score makes you appear less risky to lenders. You demonstrate responsible financial behavior by consistently paying your bills on time and avoiding excessive credit use. Lenders are more likely to offer you a low interest rate closer to the advertised rates because they don't need to adjust for a low credit score. Building a strong credit score takes time, but it's never too early to build a healthy credit history.

Improve Your Debt-to-Income Ratio

Your debt-to-income ratio is calculated by dividing your total monthly debts by your household's gross income, which refers to your income before taxes. You can find your DTI percentage by multiplying this result by 100. A lower DTI shows a higher portion of your income can cover your debt payments, making you a more attractive borrower.

Make a Higher Down Payment

The amount of your down payment on your car loan directly influences the interest rate set by your lender. If you offer a larger down payment, you may be eligible for a lower interest rate.

Maintaining Employment Status

Auto loan lenders understand that not everyone has a consistent employment history from the moment they start working. However, they also understand that stable employment is a positive sign that a borrower is likely to repay their loan. In general, lenders prefer to see a minimum of two years of consistent employment history.

Consider a Shorter Loan Term

When you have longer loan terms, you end up paying more interest. Shorter-term loans generally have lower interest costs but higher monthly payments compared to longer-term loans. If you can afford to make higher monthly payments, it may be worth the interest savings from a lower rate.


Rebuilding a bad credit score takes time, but it doesn't mean you'll always be stuck with a high-interest auto loan. Even after securing your auto loan, it's important to keep an eye on your credit and look for ways to build and maintain a positive credit history. Over time, the negative impact on your credit report can lessen, especially if you demonstrate responsible credit behavior moving forward.

As your credit score improves, you might have the opportunity to refinance your auto loan at a lower interest rate. Alternatively, when you're ready to purchase your next car, you may qualify for a more affordable auto loan.

At Honest Autos, we understand the importance of establishing or rebuilding credit. That's why we offer flexible auto financing options to help you achieve your goal. Our financing options are designed to accommodate different credit situations, including those with less-than-perfect credit. Take advantage of our expertise and assistance in finding an auto financing solution that suits your needs.