When you need an auto loan and bad credit is making things difficult, it can be hard to qualify for the best rates and terms. Lenders typically charge higher interest rates to borrowers with poor credit, but you may be able to qualify for a lower rate with a few simple tips.
Understanding Car Loan Interest Rates
Before you can qualify for a lower interest rate as a bad credit borrower, you need to understand what interest is. Interest is what you're charged to borrow money, and your credit score is the biggest factor in determining your interest rate.
Unless you’re able to get a zero percent financing offer from a captive lender, there’s no way to avoid interest charges in financing, especially with less than perfect credit. You could pay cash, but most people aren't able to do this when buying a car.
In addition to your credit score, there are other factors involved in determining your interest rate, like the federal funds rate. These play a smaller role in how low of an interest rate you qualify for when applying for a bad credit auto loan.
The following can all impact your car loan interest rate:
- Your credit score – Your credit score is a big part of determining your interest rate. The higher your credit score, the lower the interest rate you're typically charged.
- The vehicle you're financing – New and used cars typically have different interest rates, with new vehicles getting lower rates.
- The state you live in – Not all states have the same rates, some have laws which limit the maximum interest rate lenders are allowed to charge.
- The federal funds rate – The federal funds rate is the rate banks are charged to borrow money from the Federal Reserve, and it impacts the rates lenders charge consumers. This is set by the Federal Reserve and can fluctuate.
Qualifying for a Lower Interest Rate
Now that you understand the factors that determine what your interest rate might be, let's look at what you can do to qualify for a lower interest rate on a bad credit car loan:
- Improve your credit score – Credit improvement can take time, but you can start working on it right now before you apply for your next loan. This can improve your chances of getting a lower interest rate. Raising your credit score can be as easy as paying your bills on time, or removing inaccuracies from your credit reports.
- Get a cosigner – A cosigner is someone who "lends" you their good credit score in order to help you qualify for an auto loan when you have bad credit. Cosigners sign the loan with you and act as a backup in case you can't make your payments for any reason. If you already qualify for lending, a cosigner may be able to help you get a better interest rate or loan terms.
- Apply with a co-borrower – A co-borrower, also called a joint applicant, is someone that owns the vehicle with you. You're both on the loan and title, and, if they are your spouse, your incomes are combined qualify for an auto loan together. With combined incomes and a co-borrower with better credit, you may be able to qualify for a lower interest rate.
- Rate shop – Rate shopping is when you apply with multiple lenders for the same type of loan in a short period of time, typically 14 days. Rate shopping isn't as easy to do when you have poor credit, as not all lenders work with bad credit borrowers. However, rate shopping can help when you're looking for the best interest rate on a car loan, since rates vary by lender.
The Bottom Line
Whether or not you qualify for a good interest rate on an auto loan is dependent on many factors, but you can take steps to make sure that you qualify for the best interest rate you can get. If you can wait a little while, you can work to build your credit score in the meantime in order to qualify for a lower interest rate.
However, if you need a car now, applying for a subprime loan can help. If you're unable to lower your interest rate from the start, the good news is that an auto loan can build your credit score so that you may be able to qualify for a lower interest down the line.
If you're ready to take on a car loan right now, but don't know where to start due to poor credit, look no further. Here at Auto Credit Express, we work with a nationwide network of special finance dealerships that are signed up with the lenders you need as a bad credit borrower. Simply fill out our easy, no-obligation auto loan request form to get started.