What lenders mean by a low credit car loan
A low credit car loan is a loan from a bank, credit union, or finance company that does not require a high credit score to be approved. Lenders offering these loans accept borrowers with credit scores below 620, and some will work with scores in the 500s or lower. The trade-off is straightforward: lenders charge higher interest rates to offset the risk they take on.
The term "low credit" describes the borrower's credit profile, not the loan itself. The loan works the same way as any other auto loan — you borrow money, make monthly payments, and the lender holds a lien on the vehicle until you pay it off. What differs is the cost. A borrower with a 750 credit score might pay 5 percent interest on a $20,000 loan, while a borrower with a 550 score on the same loan might pay 15 to 20 percent or higher.
Interest rates for low credit borrowers vary widely depending on the lender, the loan term, whether you have a co-signer, and how much you put down. Credit unions often charge less than buy-here-pay-here dealerships, which often charge less than online lenders specializing in subprime auto loans. Shopping across lender types matters.
Key Takeaways
- Low credit car loans carry interest rates of 10 to 25 percent or higher, depending on your credit score, the lender type, and how much you put down.
- Credit unions typically offer the lowest rates for low credit borrowers, followed by traditional banks with subprime programs, then buy-here-pay-here dealerships and online lenders.
- A larger down payment reduces both the loan amount and the lender's risk, which can lower your interest rate by 1 to 3 percentage points.
- Preapproval from a lender before you visit a dealership protects you from dealer markup and gives you negotiating power on the vehicle price.
- Some lenders report your on-time payments to credit bureaus, which can raise your score over time; others do not, so ask before you sign.
Where to find low credit car loans
Credit unions are usually the cheapest source. If you belong to one, ask whether they have a subprime auto loan program or will work with members whose credit is below 620. Credit unions do not always advertise these programs, but many offer them. Rates typically range from 9 to 18 percent depending on your score and down payment.
Traditional banks like Wells Fargo, Chase, and Bank of America have subprime auto loan divisions. You can call your own bank to ask whether they offer loans to borrowers with lower credit scores, or you can visit their website and look for "bad credit auto loans" or "subprime auto loans." Rates at banks usually fall between 10 and 20 percent.
Online lenders such as LendingClub, Elevate, and Curo specialize in subprime auto loans and will often approve you without a dealership visit. You can get preapproved in minutes and see your rate before you commit. Rates vary widely — some online lenders charge 12 to 18 percent, while others charge 20 to 25 percent or more.
Buy-here-pay-here dealerships are the most expensive option. These are small dealerships that finance the car themselves and collect payments directly from you, often weekly. Interest rates at buy-here-pay-here lots typically range from 18 to 29 percent, and some charge even higher. Use this option only if you cannot get approved anywhere else.
How your credit score affects the rate you pay
Lenders use your credit score as the primary factor in deciding your interest rate. The lower your score, the higher the rate. A score of 580 to 619 might get you 18 to 22 percent. A score of 620 to 659 might get you 14 to 18 percent. A score of 660 to 699 might get you 10 to 14 percent. These ranges vary by lender and loan term, so they are not fixed.
Your credit report also matters. If your report shows recent late payments, collections, or a bankruptcy, lenders will charge you more even if your score is in the same range as someone without those marks. A bankruptcy from five years ago costs you less than one from two years ago. A 30-day late payment from last month costs you more than one from two years ago.
The length of your credit history also factors in. If you have very little credit history — few accounts, short account ages — lenders see you as riskier and charge more. Building a thin credit file by getting a secured credit card or becoming an authorized user on someone else's account can help, but it takes time.
What a down payment does to your rate and monthly payment
Putting money down reduces the amount you borrow, which lowers your monthly payment and can lower your interest rate. A down payment of 10 to 20 percent is common for low credit borrowers. Some lenders will reduce your rate by 0.5 to 1 percent for every 5 percent you put down, though this varies.
A down payment also protects you from being underwater on the loan — owing more than the car is worth. If you finance a $15,000 car with no money down and the car depreciates to $12,000 in the first year, you owe $15,000 but the car is worth $12,000. If the car is totaled, your insurance payout may not cover what you owe. A $3,000 down payment (20 percent) avoids this problem.
Down payments come from your own savings, not from a loan. Some dealerships advertise "no money down" loans, but these straightforward roll the down payment into the loan amount, raising your interest rate and monthly payment to compensate. You are not saving money; you are paying more over time.
Comparing loan terms and total cost
Low credit car loans typically run 48 to 84 months (4 to 7 years). A longer term lowers your monthly payment but raises the total interest you pay. A shorter term raises your monthly payment but saves you money overall.
To compare loans, look at the total cost, not just the monthly payment. A $15,000 loan at 18 percent over 60 months costs you about $2,850 in interest. The same loan at 18 percent over 84 months costs you about $4,200 in interest — $1,350 more. If you can afford the higher monthly payment, the shorter term saves you money.
Ask each lender for a loan estimate that shows the interest rate, monthly payment, loan term, and total amount you will pay back. Compare these estimates side by side. The lender with the lowest rate is not always the cheapest if they offer a longer term; the lender with the lowest monthly payment is not the cheapest if the rate is higher.
Getting preapproved before you shop
Preapproval means a lender has reviewed your credit and income and told you the rate and terms they will offer you, without you having committed to a loan. Getting preapproved before you visit a dealership gives you two advantages: you know your budget, and you have negotiating power.
When you walk into a dealership with preapproval from a lender, the dealer cannot mark up the rate. Some dealers act as middlemen, getting you a loan from a bank or finance company and charging you a higher rate than the lender approved. Preapproval stops this. You can tell the dealer, "I have preapproval at 16 percent; if you can beat that, I will use your financing."
Preapproval also protects you from dealers steering you toward more expensive vehicles than you can afford. If your preapproval is for $12,000, you know not to let a dealer talk you into a $18,000 car with a longer loan term.
To get preapproved, contact a credit union, bank, or online lender directly. You will need to provide your Social Security number, income, employment history, and permission to check your credit. Preapproval takes a few hours to a few days. The preapproval is usually good for 30 to 60 days.
Whether the loan reports to credit bureaus
Some lenders report your on-time payments to the three major credit bureaus — Equifax, Experian, and TransUnion. Others do not. If a lender reports, your on-time payments build your credit history and can raise your score over time. If they do not report, the loan does nothing for your credit, even if you pay perfectly.
Buy-here-pay-here dealerships rarely report to credit bureaus. Many online lenders do not report either. Banks and credit unions usually do. Before you sign a loan agreement, ask the lender directly: "Do you report payments to Equifax, Experian, and TransUnion?" If they say no, the loan will not help your credit.
If building credit is important to you — and it should be, because your next loan will be cheaper if your score rises — choose a lender that reports. Over three to five years of on-time payments, your score can rise 50 to 100 points or more, which will lower the rate on your next car loan or other borrowing.
Frequently Asked Questions
Can I get a low credit car loan with no down payment?
Yes, but the lender will charge you a higher interest rate to compensate. No-money-down loans are more expensive over the life of the loan because the lender takes on more risk. If you have any savings, putting down even $1,000 to $2,000 will lower your rate and monthly payment.
What happens if I miss a payment on a low credit car loan?
Most lenders will charge you a late fee (typically $25 to $50) and report the late payment to credit bureaus, which will lower your score further. If you miss multiple payments, the lender can repossess the car. Some lenders offer a grace period of a few days; ask about this before you sign.
Can I refinance a low credit car loan later?
Yes, if your credit score improves. After 12 to 24 months of on-time payments, your score may rise enough that you can refinance at a lower rate with a different lender. This can save you hundreds of dollars in interest. Check your credit score every six months to see when refinancing becomes possible.
Is a co-signer worth it if my credit is very low?
A co-signer with good credit can lower your interest rate by 2 to 5 percentage points. However, the co-signer is legally responsible for the loan if you do not pay. Only ask someone to co-sign if you are confident you can make every payment on time.
What is the difference between a low credit car loan and a buy-here-pay-here loan?
A low credit car loan comes from a bank, credit union, or online lender and works like a normal car loan. A buy-here-pay-here loan comes from a small dealership that finances the car itself and collects payments directly from you, often weekly. Buy-here-pay-here loans are more expensive but easier to get if your credit is very poor.