You can buy a car with bad credit, but you will pay more for the loan and have fewer dealer choices

A low credit score does not lock you out of car buying. Lenders who work with people who have bad credit exist, and dealerships know how to connect you with them. The trade-off is real: interest rates are higher, down payments are larger, and the terms are shorter. A person with a 750 credit score might get a 4% interest rate; someone with a 580 score might see 12% to 18%. Over a five-year loan, that difference costs thousands of dollars.

The path forward depends on whether you have time to improve your score first, how much cash you can put down, and whether you need the car when ready. Each choice has a different cost and timeline.

Key Takeaways

  • Bad credit loans carry interest rates between 10% and 20%, so a larger down payment shrinks the amount you finance and reduces total interest paid.
  • Credit unions often offer lower rates than buy-here-pay-here dealers and traditional car lots, and membership is sometimes open to people outside the organization.
  • A co-signer with good credit can lower your rate significantly, but they are legally responsible if you stop paying.
  • Waiting three to six months to rebuild your score by paying bills on time and reducing credit card balances can save you thousands in interest.
  • Buy-here-pay-here dealers let you make weekly or bi-weekly payments and repossess the car if you miss a payment, so read the contract carefully.

How interest rates and down payments work when credit is low

Lenders price risk into the interest rate. A low credit score signals past missed payments, high debt, or both. To offset the risk that you will not repay, lenders charge a higher rate. That rate is applied to the loan amount, so a larger down payment reduces what you borrow and therefore reduces the total interest you pay over the life of the loan.

A $15,000 car with a $3,000 down payment leaves a $12,000 loan. At 15% interest over 60 months, that loan costs about $4,900 in interest alone. The same car with a $6,000 down payment leaves a $9,000 loan, which costs about $3,675 in interest. The extra $3,000 down saves you $1,225 in interest. If you have time to save before buying, that is often the highest-return use of your money.

Where to find lenders who work with bad credit

Credit unions are often the cheapest option. They are member-owned and tend to look at your full financial picture rather than just your credit score. Some credit unions let you join based on where you work or live; others require a deposit of $25 to $100 to open a membership. Call ahead and ask whether they offer auto loans to members with credit scores in your range. Rates are typically 2% to 4% lower than buy-here-pay-here dealers.

Traditional banks usually require a credit score above 620, but some have programs for scores as low as 580. Call your own bank first — existing customers sometimes get better terms. If they decline, ask whether they can refer you to a lender they work with.

Online lenders like Upstart, LendingClub, and Elevate advertise to people with bad credit. They pre-may have access to you without a hard credit pull, so you can see rates before committing. Read the contract for prepayment penalties — some charge a fee if you pay off the loan early.

Buy-here-pay-here dealers are car lots that also finance the sale. They accept people with any credit score and do not require a down payment. The catch: interest rates run 18% to 29%, and you make payments weekly or bi-weekly at the lot itself. Many require you to install a GPS tracker on the car. If you miss a payment, they repossess the vehicle. Use this option only if you cannot borrow elsewhere and need a car when ready.

Dealership financing through the car lot itself is possible but usually the most expensive route. Dealerships work with multiple lenders and mark up the rate, so you pay more than you would borrowing directly from a lender.

Using a co-signer to lower your rate

A co-signer is someone with good credit who signs the loan alongside you. The lender looks at their credit score and income, not yours, so you may may have access to for a much lower rate. A co-signer with a 700+ score can sometimes cut your rate in half.

The legal reality matters: a co-signer is fully responsible for the loan if you do not pay. If you miss payments, the lender will pursue them for the full amount. Late payments also damage their credit score. Only ask someone you trust completely, and be clear about what you are asking them to take on. A parent, spouse, or close family member is typical; a friend is riskier because money disputes damage relationships.

Whether to wait and rebuild your credit first

If you do not need a car when ready, waiting three to six months to improve your score can save you thousands. The fastest way to raise a low score is to pay all bills on time and reduce credit card balances below 30% of your credit limit. A score that rises from 580 to 640 might lower your car loan rate from 18% to 12% — a difference of $1,500 to $2,000 over five years.

Check your credit report at annualcreditreport.com (the only free site authorized by the federal government). Look for errors — a missed payment that was not yours, a closed account still showing as open, or a collection account that was paid. Dispute errors directly with the credit bureau. Correcting a false entry can raise your score 20 to 50 points in weeks.

Paying down existing debt is slower but reliable. If you have a credit card with a $5,000 balance and a $10,000 limit, you are using 50% of your available credit. Paying it down to $3,000 (30% of the limit) signals lower risk and raises your score. This takes time, but it is the most stable way to improve.

What to watch for in the contract

Read the full loan agreement before signing. Look for these terms:

  • Interest rate and APR: The APR (annual percentage rate) includes the interest rate plus fees, so it is the true cost. Make sure it matches what you were quoted.
  • Loan term: Longer terms (72 or 84 months) lower your monthly payment but cost more in total interest. Shorter terms (48 or 60 months) cost less overall.
  • Prepayment penalty: Some lenders charge a fee if you pay off the loan early. Avoid this if possible — it prevents you from saving money by refinancing later.
  • Gap insurance: This covers the difference between what you owe and what the car is worth if it is totaled. It is optional and often overpriced at the dealership; check whether your auto insurance includes it.
  • Warranty and service: Buy-here-pay-here dealers sometimes bundle these in. Understand what is and is not covered.

Do not sign anything you do not understand. Ask the lender or dealer to explain any term you are unsure about, and request a copy of the full agreement before you commit. You have the right to take it home and review it.

Refinancing later when your credit improves

Your credit score will improve as you make on-time payments. After 12 to 24 months of perfect payment history, you may may have access to to refinance the car loan at a lower rate. Refinancing means taking out a new loan to pay off the old one. If your rate drops from 16% to 10%, you could save hundreds of dollars on the remaining balance.

Contact your current lender and ask about refinancing options, or shop with credit unions and banks. There is usually a small fee ($50 to $200) to refinance, but the savings often justify it. Do the math before committing: calculate the new monthly payment, the total interest you will pay, and subtract the refinancing fee. If you are saving more than the fee costs, refinance.

Frequently Asked Questions

What credit score do I need to buy a car?

There is no single minimum. Traditional banks usually want 620 or higher. Credit unions often work with scores as low as 580. Buy-here-pay-here dealers accept any score. The lower your score, the fewer lenders will work with you and the higher your rate will be.

Can I get a car loan with no down payment?

Buy-here-pay-here dealers do not require a down payment. Traditional lenders and credit unions usually want 10% to 20% down. A larger down payment lowers your interest rate and monthly payment, so saving for one before you buy saves money over time.

What happens if I miss a payment on a buy-here-pay-here loan?

Most buy-here-pay-here dealers repossess the car within days of a missed payment. You lose the car and any money you have already paid. Some dealers allow a grace period or let you catch up, but read your contract to know the exact policy before signing.

Should I buy a new car or a used car with bad credit?

Used cars are cheaper, so you can put a larger down payment on one and borrow less. Lenders also prefer used cars because they hold their value more predictably. A used car is usually the better choice when credit is low. Check the vehicle history on Carfax or AutoCheck before buying.

Can I refinance my car loan if I have bad credit?

Not when ready. Lenders want to see 12 to 24 months of on-time payments before they will refinance. As your payment history improves and your credit score rises, refinancing becomes possible and can save you significant money.