Understanding Bad Credit Car Loans: A Comprehensive Guide

Posted Wednesday, Jun 12, 2024

Credit scores represent creditworthiness, and your lender uses them to make decisions about auto loans. It tells them how likely you’ll default on your debt obligations or how worthy you are to receive new credit.

The most commonly used credit scoring models are FICO and VantageScore, and each has scores ranging from 300 to 850; some auto lenders also rely on an industry-specific FICO model that consider certain factors, such as previous car loan payments, to assess if an individual is credit worthy, and this model range comes between 250 to 900.

The cutoff number that puts a person in the "bad credit car loans" is different by credit scoring model; in general, if you have a good credit score, you can get more credit at better interest rates. On the other hand, having bad credit scores can make it difficult for you to get approved for auto loans, credit cards, mortgages, and more.

What is a Bad Credit Score?

Credit scores might look like just three digits, but they can impact your life in several ways. Lenders usually review them when you apply for loans, and a poor score could result in very high interest rates or your application getting rejected.

In the FICO (Fair Isaac Corporation) scoring model, if your credit score lands between 300 and 579, it will be considered a bad score and the lender may consider you a riskier borrower.

In 2023, the average FICO score was 715 points, which is a good range, and a score below 670 means you have subprime credit and are well below average.

VantageScore credit scoring model takes data from consumer credit reports, and a score between 300 to 660 is considered a subprime score, and below 500 is very poor.

The FICO® Auto Score is an industry specific version of the FICO® Score that is used in the auto financing industry, and is calculated based on factors such as payment behavior and credit history. To calculate FICO® Auto Scores, adjustments are made to the standard FICO® Scores. However, the scoring range for FICO® Auto Scores is different, ranging from 250 to 900, and higher scores indicate a lower risk of default.

How Bad Credit Can Impact Your Car Loans?

A bad credit score can have many negative consequences. If you consistently pay your bills late, you’ll not only face penalty fees but also encounter various issues. Late payments and other irresponsible borrowing behaviors can gradually damage your credit, making it a lot tougher to get auto loans in the future.

And if you somehow qualify for a bad credit car loan, you’ll likely have to pay higher interest rates to compensate for the increased risk of potential default on your part. When you apply for an auto loan with poor credit, lenders consider your credit score, income, and current debt along with the make, model, age, and condition of the vehicle you’re interested in, and based on this information, they determine your interest rate and the maximum amount you can borrow.

Types of Bad Credit Car Loans

There are various lenders who provide car loans for bad credit. The requirements of each lender differ, and one may be more willing to work with you than the other. Additionally, having multiple loan offers helps you to choose the one with the lowest interest rate.

Banks and Credit Union: Banks and credit unions, known as direct lenders, are a good starting point when looking for a car loan. If you have a positive relationship with your bank or credit union, they might be more willing to work with you. Still, they might have higher minimum credit score requirements.

Online Lenders: You can qualify for financing through online lenders without any negative impact on your credit score. These online lenders provide the facility to apply to multiple lenders using a single loan application. However, keep in mind that you won't be supported in person, and you may not be familiar with the specific lender you're matched with when using an online loan platform.

Auto Dealerships: Auto dealerships also provide access to auto loans for individuals with bad credit, where many secure their loans. Finance officers at dealerships often have relationships with banks and credit unions and offer either a fixed fee or a percentage based on the loan amount. They can also adjust interest rates within the lender's guidelines. Some dealerships even offer their own financing options for customers with bad credit, where borrowers make payments directly to the dealer through a buy here, pay here auto financing.

How to Improve Your Chances of Approval

If your credit score is lower, there are potential ways to quickly improve it. Depending on the factors impacting your score, you may be able to increase by as much as 100 points within a short period of time.

Here are a few simple steps you can follow to raise your credit score fast:

Review Your Credit Reports: When looking to improve your credit score, start by reviewing your credit reports to know the factors that are most affecting it. Check for any errors on your credit report, including inaccurate personal information or signs of identity theft and fraud, and if it's affecting your score, dispute this information with the credit bureaus. Submitting a dispute does not affect your credit itself, but if any content in your report is corrected or removed, your score could change, too.

Pay Your Bills on Time: Your payment history is one of the most important factors in determining your credit scores, and making timely payments over a long period can help you achieve excellent credit scores. If you struggle with on-time payments, consider using automatic payments for your accounts or setting up alerts to remind you to pay.

Low Credit Utilization Rate: The portion of your FICO® Score related to amounts owed accounts for 30%, making it the second most significant factor after payment history. Your credit utilization rate, which indicates the amount of your credit limit that you are currently using, is an important aspect. Experts suggest keeping your credit utilization below 30% at any given time, and try to pay off your credit card balance in full each month. However, if that's not possible and you currently have a balance, create a plan to stop using your cards and focus on reducing your credit card debt.

Limit Applying For New Accounts: While it may be necessary to open accounts to build a credit history, it is generally recommended to limit the frequency of submitting credit applications. Each application can result in a hard inquiry, which might hurt your credit scores a little, and multiple inquiries can add up and have a negative effect on your scores. Additionally, opening a new account will lower the average age of your accounts, which can also hurt your scores.

Applying for Bad Credit Car Loans

The process of getting car loan for bad credit is relatively easy and can be broken down into the following steps:

Make a Budget: Consider your financial situation and determine how much you can comfortably afford to borrow and repay each month. Creating a budget will help you choose a loan amount you can afford to repay each month and find a car that fits your budget.

Compare Different Lenders: Shop around and compare loan terms, interest rates, and repayment options from different lenders to find the most favorable loan terms that fit your financial situation.

Submit Necessary Documents: Once you find a suitable lender, you will be required to submit the necessary documentation, such as proof of income, residency, insurance, and any other documents specified by the lender to streamline the application process.

Understand and Negotiate the Loan Terms: Carefully review the terms of the loan, including the interest rate, payment schedule, fees, and other terms and ask for clarification on any unclear points or confusion.

Make Timely Payments: After getting the loan, it is essential to make your payments on time. This will help you avoid additional charges and fines while also gradually improving your credit score.


If you have really poor credit, you might feel embarrassed, worried or guilty, but responsible financial habits, such as paying your bills on time, repaying existing debts, not maxing out your credit cards can improve your credit score and history of on-time payments.

Getting a car loan with bad credit is possible, but it requires careful planning and research. Partnering with a trusted auto dealership that offers car financing and credit repair can help you secure a loan with favorable terms and conditions. It is essential to understand the different types of bad credit car loans available and choose the one that suits your requirements.

At Honest Autos, we believe in helping individuals with a poor credit history. Whether you need assistance understanding loan details, proof of income requirements, or different types of credit, our team is here to help. With our simple loan approval process and a variety of auto financing options, we're here to turn your car ownership dreams into reality.