How to get a car loan with bad credit: A guide

Having a car is essential for most people in the U.S. You need a vehicle to run errands, get to work, and drop off kids at school. But if you have bad credit, buying a new or used car can be challenging. Here's how to get a car loan with bad credit, the types of financing options available, and how to improve your credit score before applying.

How to get a car loan with bad credit

If you're looking to buy a new or used car, here's how to get a car loan with bad credit. No matter what type of credit history you have, it is possible to get loan approval from these financing options.

Dealer financing

Car dealers have a variety of financing options available, including bad credit car loans. The salesperson's primary mission is to sell a car, so their finance department offers car loans for people with bad credit, excellent credit, and everywhere in between. Financing a car at the dealership makes the car-buying process easy for car shoppers. You visit dealerships until you find the car you like, then head into the finance department to finalize the transaction.

However, a simple process doesn't mean that you're always getting the best deal. The finance department typically has a limited set of borrowing options, so it’s best to shop around before car shopping. Dealer financing typically offers 36 to 76-month financing, and rates based on your credit history.

Bank or credit union loans

Many banks and credit unions offer auto loans with appealing interest rates and terms. Getting your financing outside of the dealership allows you to negotiate each part of the deal individually. You can shop for the best deal on an auto loan by comparing bank and credit union auto loan programs. Then, once you've been pre-approved, you can focus your negotiations with the dealer purely on the purchase price of the vehicle. This avoids the salesperson tactic of "What monthly payment are you looking for?"

If you're thinking about financing a car through the dealer, get preapproved by a credit union or other lender before heading to the dealership. You'll know what loan amount, interest rate, and loan term you're approved for. This provides negotiating leverage with the dealer's finance department, which can help you get a better deal. If the dealer cannot beat the terms, you may be able to stack your preapproval with the dealer's cash back rebates to save even more money.

Personal loans

A personal loan is an unsecured loan based on your personal credit and income. These loans are often used to consolidate debt on credit cards, pay for small home repairs, cover a medical procedure, or start a small business. While personal loans tend to have higher interest rates than an auto loan secured by a vehicle, that isn't always the case with bad credit car loans. Personal loans may also offer more flexibility with payment structures and loan terms than auto loans.

Since auto loans are available from a limited number of financial institutions, there are more potential lenders you can shop around with for a personal loan. Comparing quotes from online lenders, credit unions, and banks is a good way to find offers for car loans for people with bad credit. Since the personal loan isn't secured by your vehicle, if you miss a payment or default on the loan, the car is less likely to get repossessed.

Home equity financing

Your home tends to increase in value over time, and the mortgage balance goes down as you make your monthly payments. These two forces combine to build equity in your home. Instead of applying for a car loan, you can tap into your home equity instead. There are three main types of home equity financing that allow you to withdraw cash from your home.

• Home equity lines of credit (HELOCs). HELOCs provide a maximum credit that you can borrow against. It requires interest-only payments each month during the draw period based on how much you've withdrawn. As you pay down your balance, you'll free up additional credit for future borrowing. Since the interest rate is variable, your monthly payment can fluctuate.
• Home equity loans. A home equity loan provides a lump sum of cash upon approval. You'll make consistent payments each month for a set period, ranging from 5 to 30 years, with a fixed interest rate. If you need extra cash, you'll need to apply for another loan.
• Home equity investment (HEI). Home equity investments allow homeowners to tap their equity without adding another payment to their monthly bills. It can be a worthwhile option for individuals with poor credit, as it doesn't require perfect credit or income verification for approval. In exchange for a lump sum of cash, you’ll share a future percentage of your home’s future appreciation. This can be done anytime during a flexible 30-year term when you sell, refinance, or use another source of funds. 

Because home equity financing carries closing costs and fees, it’s best to leverage this option when you need a large loan amount or have various financial goals to tackle. It’s also important to remember that your home serves as collateral; defaulting could result in foreclosure.

401(k) loans

When you have bad credit or financial trouble, you may be tempted to borrow against your 401(k) account. Borrowing from your 401(k) is a good alternative to car loans for people with bad credit. There are no credit checks, and almost all eligible workers can get approved.

You repay the loan through normal paycheck contributions, and you can pay extra to pay off the loan faster. However, 401(k) loans are limited to $50,000 or 50% of your vested balance, whichever is lower. According to Kelley Blue Book, the average new car was $49,740 in January 2025, so a 401(k) loan may not be able to cover the entire purchase price of your vehicle. Additionally, if you leave your job before the loan is paid off, you'll owe taxes and penalties on the remaining balance. Since it's possible to face a retirement shortfall if you can't make catch-up contributions, you should consult an advisor before pulling from your 401(k). 

How to get a car loan with bad credit

No matter which financing option you're considering, here's how to find and secure the best interest rates and terms for your situation.

• Check your credit report and score. Reviewing your credit report helps you correct mistakes and discover opportunities to improve your score. Make all payments on time and reduce your credit card balances to give your credit score a boost before applying.
• Set a realistic budget. Having bad credit usually means higher interest rates, which can make monthly payments higher. Review your income and expenses to figure out how much you can comfortably afford. Consider buying a used car or cheaper vehicle until your credit score improves.
• Save for a down payment. A larger down payment can reduce your monthly payments and may qualify you for more appealing auto loan terms. It also eliminates the need to purchase gap insurance.
• Compare lenders and offers. Regardless of your credit score, shopping around helps you find the best deal on an auto loan.
• Consider a co-signer. Adding a co-signer can strengthen your application with their income and good credit score. This can help you qualify for better terms than you can on your own.

Frequently asked questions

Can I get a car loan without a job?

Getting a car loan without a job can be challenging. Some lenders consider alternative sources of income, such as retirement, investments, or real estate, when evaluating your application. Others allow borrowers to state their income without verifying it with their employers.

Can you get approved for a car loan with a 500 credit score?

Yes, there are lenders that offer car loans for people with bad credit. Typically, the lower your credit score, the higher your interest rate and monthly payments are. Some lenders allow borrowers to extend their loan term to seven or eight years to reduce payments, but this risks owing money on a car that has depreciated significantly.

Can I refinance a car loan?

Yes, you can refinance your car loan at any time. As your credit improves with on-time payments and reducing your credit utilization, refinancing your auto loan is a smart decision for people with car loans for people with bad credit.

The bottom line

If you're wondering how to get a car loan with bad credit, there are many options available. While you can't fix your credit overnight, taking steps toward a higher credit score can help you qualify for lower interest rates. Dealer financing and auto loans from a bank or credit union are usually the first option, but tapping your home equity, getting a personal loan, or using a 401(k) loan may provide better results. It pays to explore all of your financing options to keep your monthly payment low and reduce the amount of interest you'll pay on the loan.

‍