The interest rate you're likely to qualify for on a bad credit car loan depends on a few different factors, including your credit score, the lender you're financing with, and the length of your loan term. If you're not happy with the annual percentage rate (APR) you initially qualify for, there are a number of ways you can reduce your interest rate.
Build Your Credit to Lower Your Interest Rate
In order to qualify for the lowest interest rate you can, it helps to have good credit. Credit is the main factor in determining your interest rate. Typically, if your credit score falls around 660 or below, you're considered a poor credit consumer. This means facing a higher-than-average interest rate when you need an auto loan.
In order to get the best rate you can, it helps to improve your credit score before applying for a bad credit car loan. The higher your credit score when you apply, the better rate you're likely to qualify for.
If your credit is still lower than you'd like, but you need a vehicle now, you're not out of luck. There are subprime lenders that work with people in challenging credit scenarios. Due to your credit, you may not qualify for as low a rate as you would with better credit, but, sometimes, just getting approved for an auto loan that can improve your credit score is half the battle.
Apply With a Cosigner or Co-Borrower
If you're in a bad credit situation, applying for a car loan with a cosigner or co-borrower can put you in the running for a better interest rate. Both a cosigner and a co-borrower can possibly bring better loan terms than you might qualify for on your own. They can usually only do this if their credit score is exceptionally better than yours, though.
Even though both a cosigner and a co-borrower may help you get a lower interest rate, their roles in your auto loan are remarkably different. A cosigner is simply a backup who lends you their good credit score to assist you in qualifying. Besides agreeing to put their credit on the line for you, they also agree to pick up the slack if you can't (or don't) make your monthly payment. A cosigner's name doesn't end up on the vehicle's title, so you remain the sole owner of the car once your loan is paid off.
With a co-borrower, on the other hand, their name is added to the vehicle title and they're considered a joint applicant with you. This means that both you and the co-borrower are responsible for the car, during the loan and once it’s paid off. Additionally, a co-borrower doesn't lend you their credit score for application purposes, but their income instead. If your income isn't up to snuff for a lender, adding a co-borrower whose income can be combined with yours (typically a spouse or domestic partner), you have a better chance at a loan approval, as well as possibly qualifying for a lower interest rate.
A Bigger Down Payment Can Equal a Better Interest Rate
Last on our list, but certainly not least, is a down payment. A down payment is perhaps one of the easiest ways to save money on your auto loan, and possibly to lower your interest rate as well.
Making a down payment lessens the amount you borrow, so you're charged less in interest over the course of your loan. You may also be able to qualify for a better vehicle choice or a shorter loan term. Shorter loan terms are often eligible for lower interest rates than long term loans.
Shop for the Lowest APR
One surefire way to get the lowest interest rate you can is by rate shopping. Rate shopping may not give you many options if you have poor credit, but it lets you know what your options look like and allows you to choose the APR offer that best meets your needs.
To rate shop for a car loan, you apply for multiple loans of the same type over a short period of time – typically, two weeks. Doing this allows you to compare rates while only one hard inquiry is reflected on your credit score.
Refinancing for a Lower Interest Rate
If you get an auto loan through a subprime lender, you have a chance to build credit while you make timely payments, and you may be able to refinance to a lower APR after you've made consistent on-time payments for at least a year. One of the catches is that your credit score must have improved during that time if you want to qualify for a better interest rate.
Refinancing is done as a means of saving money on your monthly car loan payment. You can do this is one of two ways: by extending your loan term, or lowering your interest rate. Both methods save you money month to month, but only a lower interest rate can save you money overall.
Ready to Shop for Your Next Car Loan?
As you can see, there are many options when it comes to qualifying for a better interest rate on your next auto loan. The lower your interest rate is, the more money you can save overall, as interest is the cost of borrowing money.
If you have poor credit and need vehicle financing, we want to help you start out on the right foot. Here at The Car Connection, we work with a nationwide network of special finance dealerships that are signed up with the lenders available to assist people in low credit situations.
Simply fill out our fast, free, and no-obligation car loan request form, and we'll get to work connecting you with a local dealer!