Bad credit happens for all kinds of reasons; medical bills, divorce, lost jobs, or simply not paying bills on time.  Sometimes bad credit can prevent you from getting what you want, whether it’s a new apartment or a new cell phone plan.  Other times, bad credit can affect how much you pay for something, like insurance companies that charge higher rates to people with bad credit.  While bad credit may create obstacles, it doesn't always prevent you from securing an auto loan. Today, many lenders offer subprime card loans, but the terms, including interest rates and loan conditions, will vary based on credit history.

How Bad Credit Affects Getting Approved for a Car Loan

Lenders adjust their loan terms based on risk assessment. A history of missed payments or high debt usage can lead to higher interest rates on car loans, making it crucial to compare offers before making a decision. Remember, everyone with bad credit has a reason, but the lender doesn’t know you. All they know is they more losses on bad credit loans than good credit loans, so they adjust their loan offerings accordingly.

Higher Interest Rates

The first is simple; lenders charge higher interest rates to borrowers with bad credit.  When people with really good credit are paying 5% in interest, someone with really bad credit might be paying 20%.  That means the lender can afford to have five defaults for bad credit loans compared to good credit loans and still make the same profit.  It also means the borrower with bad credit has a monthly payment of $570 per month instead of $370 on a $25,000 loan for 72 months.  It’s the same car at the same price, but the borrower with bad credit pays $14,000 more in interest over the term of the loan.

Down Payment

Lenders might also require a borrower with bad credit to have a down payment whereas someone with good credit can borrow for the full price of the car plus taxes and license.  That’s because starting with a lower loan amount compared to the price of the car reduces the lender’s risk.  If you have bad credit, saving for a down payment or having a trade-in can improve your chances of getting approved by lowering the loan up-front and showing you're invested in repaying the loan.

Improving Your Credit Score

A lower credit score often leads to increased borrowing costs, but taking steps to improve financial standing can open the door to affordable car loan plans in the future. The good news is bad credit doesn’t have to last forever. Today, many lenders approve loans based on your credit score. You can improve your credit score very quickly by first attacking balances on your credit cards.

  • Paying off outstanding balances, particularly on credit cards, helps raise credit scores.
  • Consistently making payments on time builds a positive payment history.
  • Saving for a down payment improves loan approval chances and reduces overall costs.
  • Refinancing down the road can help secure lower used car loan interest rates after improving credit.

Metro Credit Union | Best Car Loan Rates in Omaha

At Metro Credit Union our goal is to help you get the best deal possible, whether you finance with us or not! We'll use our resources to determine if you're paying a fair price for a new or used vehicle, whether you're getting the maximum out of your trade, and determine if your loan rate is competitive. All of this at no charge, with no sales pressure. It just makes sense to start your car buying experience with someone you trust, your credit union! Plus, we offer great deals on extended warranties & GAP insurance.