Financing a Car with Bad Credit

Looking at the options borrowers with poor credit may have if they need a car, have been turned down by traditional lenders, and can’t pay for a vehicle in cash.

Subprime and Non-Prime Car Loans

If you’ve been turned down for a car loan with prime or near-prime interest rates from your credit union, bank, or a captive lender (like Ford Motor Credit), depending on your income and credit history, there’s always the possibility that you might qualify for a subprime (sometimes called non-prime) car loan -  loans typically offered to car buyers with FICO scores of 640 or less. This score varies by lender, however, so if you’re close to it you should still apply with your bank or credit union first. At the same time, many of these subprime lenders also work with borrowers with better FICO scores, although traditional lenders usually offer these borrowers better interest rates.

Who are these subprime car lenders?

There are currently more than 20 national subprime lenders and at least that many subprime regional (operating in less than 50 states)  lenders. A handful of the national ones – such as Capital One, Chase, Toyota Motor Acceptance’ and GM Financial - are publicly-held corporations doing business on one of the major stock exchanges. Most of the regional ones and a few of the national lenders are privately held. And while a few offer loans directly to buyers, most, because of paperwork and documentation issues, only offer loans through franchised new car dealerships, while some also offer loans through licensed car dealers.

Additional Paperwork and Documentation for Subprime Car Loans

Because they’re offered to buyers with credit issues, subprime loans are riskier for lenders than prime loans. The result is that subprime lenders typically require borrowers to furnish documents to prove their income and residence. These lenders may also ask for payment records if the residence is being rented or purchased on a land contract, since these records of these are not usually found in credit reports.

What is the Interest Rate?

This question is usually the first one asked, but the answer isn't simple. The interest rates these lenders charge are based on factors that include a borrower’s current credit score, past payment and residence history, and down payment amount, just to name a few. Like prime lending, there are different credit tiers based on the lender’s credit formula. At the higher (better) end of subprime, interest rates may be just a few points above near prime rates, while, at the lower end, annual percentage rates can be as high as 30 percent. According to the second quarter 2022 Experian State of the Auto Finance Market report, the average subprime interest rate for a new car was 14.76 percent, while the average subprime interest rate on a used car was 20.99 percent.

Is it cheaper to finance through a BHPH dealer?

Yet another choice for credit-called car buyers is a local buy here pay here (BHPH) dealer. These dealers finance the vehicles on their lots themselves - typically not relying on a bank of finance company to get their customers approved. The good news here is that many of these dealers will not check the credit of their customers. The bad news - if this is the case - is that these dealers also typically won’t report loans or payments to the credit bureaus. Thus, a good payment history won’t improve the borrower’s credit.

In many cases the price of the vehicles on the lot are often less than those on the used car lots of franchised new car dealers. But in fact, the selling prices are lower because the cars are usually older with higher miles. This means higher maintenance and upkeep costs. Furthermore, it's not uncommon for these vehicles to require major repairs  - replacing brakes, steering racks, exhaust systems and even engines. These costs can double or even triple a vehicle’s original price. Older cars also tend to be less reliable – especially in the winter months when they're needed the most.

Secondly, due to their age, any warranties that might be available are very limited as to the systems covered and the length this coverage is available.

Finally, many of these dealers charge the highest interest rates allowed by the state where they do business, which can be as high as 30 percent.

At the same time, at least most BHPH tote the note dealers work with poor credit buyers. Not all new car dealers are willing or able to, and a few that supposedly do don't always do such a good job of it.