Why Credit Matters So Much When Buying a Car
Car financing is largely dictated by your credit score, which acts as a report card for lenders on how risky it is to loan you money. According to a 2024 Experian Automotive report, individuals with good credit scores—typically above 660—secure average interest rates between 6% and 8%. However, for people with credit scores below 600, the average interest rate jumps sharply, often exceeding 13% and, in many cases, soaring over 20%. This seemingly small difference in percentage points can result in thousands of dollars in extra costs over the life of a typical car loan.
This is particularly important in today’s market, where car prices have climbed significantly, and even used vehicles come at premium prices due to supply shortages and increased demand. For example, a $20,000 car loan at a 7% interest rate over five years results in approximately $3,750 in interest paid. Contrast that with a 19% interest rate on the same loan amount and term, and you’re looking at over $10,500 in interest costs—an additional $6,750 simply due to credit differences. These numbers highlight how crucial your credit score is, not just in determining your ability to get a loan, but also how much you will ultimately pay for the vehicle.
Who Offers Car Loans to People with Bad Credit?
When your credit score is low, many traditional banks and lenders will shy away from offering you financing, or they will offer it at very high rates. Fortunately, there are lenders who specialize in working with people who have limited or damaged credit histories. These include online auto lenders, buy-here-pay-here dealerships, credit unions, and subprime auto lenders.
Buy-here-pay-here dealerships often don’t require credit checks, but they compensate for this by charging steep interest rates and imposing strict repayment terms. They tend to have more frequent repossessions and use GPS trackers or “kill switches” on vehicles to enforce payment compliance. While these dealerships offer accessibility, they come at the price of high financial risk and long-term cost.
Credit unions, on the other hand, generally offer more lenient terms and lower interest rates than traditional banks, especially to members with steady employment and income. Credit unions consider a wider array of factors beyond your credit score, such as your job stability and savings habits. Many consumers with bad credit find credit unions to be a more affordable and flexible financing option.
Online lenders like RoadLoans and Auto Credit Express specialize in helping consumers with credit scores below 600. These lenders provide quick pre-approval decisions and work through a network of dealers accustomed to handling higher-risk loans. Although the interest rates can still be higher than prime lenders, the process is typically more transparent and streamlined.
Real Cost of Bad Credit Car Loans
The difference in loan costs based on credit scores can be staggering. To illustrate, here’s a breakdown of interest costs on a $20,000 car loan over 60 months for different credit score ranges, based on 2024 data:
| Credit Score Range | Average Interest Rate | Total Interest Paid Over 5 Years | Total Loan Cost |
| 700+ (Good Credit) | 7% | $3,750 | $23,750 |
| 600-659 (Fair Credit) | 11% | $5,830 | $25,830 |
| Below 600 (Poor Credit) | 19% | $10,500 | $30,500 |
These figures clearly show that having bad credit can more than double the interest cost on a car loan. The higher monthly payments and total cost place a heavy financial burden on borrowers who are already in a tight spot.
Strategies That Actually Work
Even with bad credit, securing car financing at a reasonable rate is possible if you approach the process wisely.
Start by reviewing your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. You can get a free report from each bureau once a year. Look carefully for errors such as outdated accounts, mistaken late payments, or incorrect balances. Correcting these errors can improve your score before you apply for a loan.
Next, calculate a realistic budget based on your income and expenses. Many subprime lenders will require proof of stable income and a down payment, usually around 10% of the car’s value. The more you can put down upfront, the less you need to borrow, which lowers the lender’s risk and can lead to better rates.
Don’t settle for the first lender you find. Because each lender uses different underwriting criteria, submitting multiple applications within a two-week window counts as one credit inquiry, minimizing damage to your credit score. Comparing offers can save you thousands by finding the lowest possible interest rate and best loan terms.
Bringing a co-signer with good credit can also open doors to better loan conditions. The co-signer agrees to take responsibility for the loan if you default, which reduces the lender’s risk and lowers interest rates. It’s crucial that both parties fully understand the commitment, as missed payments impact both credit scores.
Avoid the Worst Traps
Borrowers with bad credit are vulnerable to predatory lending practices. Some buy-here-pay-here dealers charge interest rates over 25%, repossess cars immediately after missed payments, and use invasive technologies to ensure payments. These loans may seem convenient but often trap borrowers in cycles of debt and repossession.
Balloon payment loans are another red flag. They offer lower monthly payments upfront but require a large lump sum at the end of the loan. If you cannot pay this amount, you risk losing the vehicle or defaulting on the loan.
Also be wary of lenders that promise “guaranteed approval” without verifying your income or employment. These offers typically come with hidden fees and exorbitant interest rates that create long-term financial strain.
Rebuild Credit Through Smart Repayment
One silver lining to taking a car loan, even with bad credit, is the opportunity to rebuild your credit score. Auto loans are installment loans, meaning you make fixed monthly payments. Lenders report your payment history to credit bureaus monthly. Consistently paying on time improves your score over time.
Within 12 to 18 months of timely payments, many borrowers see noticeable improvements in their credit score. This improvement can lead to refinancing options at lower interest rates, saving you thousands in interest payments.
Pairing your car loan with other good credit behaviors—such as using a secured credit card responsibly, keeping credit balances low, and avoiding new credit inquiries—can accelerate credit recovery.
Real Stories
James, a part-time software developer with a credit score around 580, financed a $12,000 used car at 20% APR over five years. By making consistent payments for 15 months, he improved his score to 648, enabling him to refinance through his local credit union at 9.5% APR. This move saved him over $3,000 in interest over the remaining term.
Conversely, Maria, a single mother with a 580 score, took a $15,000 loan from a no-credit-check dealer with a 24% interest rate. When her work hours were cut and she missed a payment, her car was repossessed within a week. No grace period or warning calls were given. This cautionary tale highlights the importance of choosing lenders carefully and planning for financial setbacks.
Final Thoughts
While financing a car with bad credit is difficult, it’s not impossible. Understanding your credit score’s impact on loan cost, knowing where to look for financing, and setting realistic expectations are essential steps. Sometimes, a used car with higher interest is better than no car at all, especially when it means reliable transportation for work and family.
Treating your car loan as a tool to rebuild credit rather than just a purchase can change your financial future. Responsible repayment opens doors to better loan terms and more financial opportunities. Your credit journey is a marathon, not a sprint, and every payment moves you closer to financial freedom.
References
Experian. (2024). State of the Automotive Finance Market: Q4 2024. Retrieved from https://www.experian.com/blogs/news/2024-q4-automotive-finance-report
Bankrate. (2025). Auto Loan Rates by Credit Score. Retrieved from https://www.bankrate.com/loans/auto-loans/auto-loan-rates-by-credit-score
Federal Trade Commission. (2024). Understanding Vehicle Financing. Retrieved from https://www.consumer.ftc.gov/articles/understanding-vehicle-financing
Consumer Financial Protection Bureau. (2024). Auto loans: What to know before you buy. Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-should-i-know-before-buying-a-car