Finding financing for a car can be challenging if you have a poor credit score or a short credit history. In this blog, we take a closer look at why lenders are wary of buyers with lower credit scores and how you should go about applying for a loan if you have a lower credit score.
Straight Talk: Getting a Car Loan With Poor Credit
You might be asking yourself, “Can I get a car loan with a 600 credit score?” If you’re a would-be car owner with a low credit score, you might get an unhappy surprise when you set out to buy a car. Before offering you a loan, any lender will look at your credit score first. If your credit score is on the low side or your credit history is short, it will probably be harder for you to get a loan.
So is there such a thing as a 600 credit score car loan? Yes, but it’s likely to come with some serious strings attached, like a much higher interest rate, an excessively long payment period, or mandatory balloon payments you must make to “catch up” on payments.
The Low Credit Score Gamble
Here’s why lenders are likely to be wary of you if your credit is close to or below 600.
When lenders provide money for auto financing, they are essentially buying the car for you on the understanding that you will pay them the money back—plus interest—over time. To do this, lenders must be willing to trust that you will come up with the cash month after month until your loan is paid off.
Your credit score provides lenders with a handy way to decide how likely you are to repay your debts. The lenders access your credit record that is on file at any of the three big credit bureaus.
The credit bureaus track how you repay any form of credit you have been extended including your credit card balances, payment plans, personal loans, and even whether you pay your rent and bills on time.
A low credit score suggests that either you’ve had some problems paying back loans on time in the past or that you simply haven’t been using credit long enough to build up a better score. Either way, it’s likely to be a red flag for potential lenders.
Low Score, High Rate—High Score, Low Rate
If you have a lower credit score (likely because you’ve struggled to pay back your debt or you’re younger and don’t have a long credit history) lenders will protect themselves from the perceived risk of lending you money for a car by charging a higher interest rate on any money they lend you.
Basically, a lower credit score will undoubtedly translate into a higher interest rate or annual percentage rate (APR) on the loan you receive. Conversely, someone with a high credit score (likely because they have a good record of repaying their debt and/or they have a longer credit history) will pay less interest on a loan and might be offered more favorable terms.
Based on recent auto financing industry data, the following table shows how different credit score ranges attract progressively higher loan APRs.
| Credit score | 781-850 | 661-780 | 601-660 | 501-600 | 300-500 |
|---|---|---|---|---|---|
| Average APR New Cars | 5.64% | 7.01% | 9.60% | 12.28% | 14.78% |
| Average APR Used Cars | 7.66% | 9.73% | 14.12% | 18.89% | 21.55% |
| Distribution of Loans | 33.91% | 47.82% | 12.47% | 5.48% | 0.32% |
Source: Experian State of the Auto Finance Market Report: Q4 2023
Mixing It Up
In reality, you just may not be able to get a loan from many lenders if your credit is poor. However, there are lenders who specialize in “bad credit” or “no credit” lending who might offer you a loan—but will typically charge a much higher interest rate or levy additional fees.
Putting money into a car up front in the form of a down payment will reassure lenders that you are committed to paying your loan because you already own a substantial part of the vehicle. Paying up to 20% of the cost of your car in advance will earn you a much lower interest rate.
If your credit score is marginal, a lender may offer you financing, but over a longer period—sometimes up to seven years. Additionally, they’ll also typically charge a higher APR to cover the extra risk that you might default on your loan over this longer span.
So while you might be able to secure a vehicle, remember that a higher APR and lengthier term means you will pay much more in interest on a vehicle that will lose much of its value within the first 3-5 years of ownership.
Steps to Take to Improve Your Chances of Getting Approved
Getting an affordable car loan while having a credit score below 600 is challenging. Ideally, you should wait until you can improve your credit score (more on that later) but usually, when you’re looking at buying a new car it’s because you need one right away to get you to work or school or to run errands for your family.
Let’s take a look at some smart things you can do to make it more likely your application will be approved.
Consider a Cosigner
If your credit score is low or you have little credit history, you might be able to secure more affordable financing if you have a co-signer. This is usually a parent, guardian, or close family friend who is willing to guarantee your loan with their own good credit by signing jointly with you for the loan. They essentially agree to take over your loan if you can’t pay it.
Research Potential Lenders
Take the time to check out many different lenders including banks, car dealers, online fin-techs, and specialist auto financers. Remember to check out local credit unions like Radiant Credit Union, which often offer lower rates.
Get Pre-Approved
Ask three or more of the most promising lenders to pre-approve you for financing. They will check your credit score and will likely give you several alternatives based on your likely down payment and the length of your loan.
Evaluate Your Financing
The dealer will almost certainly also offer you financing. Compare this to your other offers but be mindful of the cost of add-ons like service agreements and extended warranties that will be rolled into the overall cost of a loan from the dealer.
While a lower APR may sound good, always look at the monthly payment you’ll need to make on each loan and the total cost of paying the loan plus interest. Choose an option that you can afford. Remember also that very long loans will mean making payments on a car that ultimately may be worth less than you owe.
How to Improve Your Credit Score
If your credit score is low and you can delay buying a vehicle, it’s worth taking the time to improve your credit score before applying for auto financing. Here are five steps you can take to improve your credit score over time.
- Check your credit reports: Pull your credit reports from all three of the credit bureaus to make sure that they are accurate and up to date. Dispute and correct any errors.
- Pay down high-interest debt: Reduce any balances you may have on a credit card, an outstanding store debt, or payday loans.
- Pay your bills on time: Late payments remain on your credit score for a long time and are an immediate red flag for lenders.
- Keep credit cards open: While it’s wise to keep credit card balances low, do not close cards that you have paid off because keeping credit accounts open gives you a longer credit history.
- Avoid new applications: If you’re planning to buy a car, try to avoid applying for other types of credit at the same time. Multiple credit applications will lower your credit score and can appear that you’re perhaps desperate to borrow money.
Car Loans: Why You Should Choose a Credit Union
We’ve already mentioned that choosing a local credit union like Radiant can make a big difference when applying for a car loan. There are a couple of reasons for this.
Credit unions are financial cooperatives owned collectively by their members. Because the focus is on providing affordable financial services to members rather than generating profits for shareholders, credit unions often offer lower APRs and more flexible loan terms. In fact, credit unions are the leading source of financing for used car sales today.
Credit unions can only succeed when their members thrive. Because of this, here at Radiant, we’re focused on taking the time to understand our members’ needs so we can be sure the financing or other financial products we recommend are in our members’ best long-term interests.
As a financial cooperative born and bred here in central Florida, we also have a better understanding of where our members come from and where they want to go. In short, we’re motivated by building long-term relationships with our members, rather than maximizing short-term profits.
Affordable Car Loans: The Radiant Difference
If you’re looking to buy a new car in Gainesville, you should consider Radiant Credit Union for your financing needs. You’ll find affordable loans that are delivered with our well-known friendly service. And, as a member, you’ll gain access to our full range of personal banking and financial services as well.
Talk to us about your auto financing needs. We provide flexible, personalized financing that will help you get the best deal possible, no matter what your credit score is. We offer:
- Financing for new and used vehicles
- An easy application and quick approval
- Great low rates
- Loan terms up to 84 months
- No application fees or pre-payment penalties
- Financing up to 120% of your vehicle sale price
We also provide a full range of add-ons including GAP insurance, breakdown protection, debt protection, plus our skip-a-pay option for unforeseen payment squeezes. Additionally, we offer motorcycle and RV loans and financing for ATVs, UTVs, and boats.
At Radiant Credit Union, we’ve got what it takes to get you moving. Contact us today, or click below to find out more.