Shopping for the Best Interest Rate with Bad Credit

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - September 24, 2019

It's no secret that you're going to be faced with a higher interest rate on a car loan when you have bad credit, but that doesn't mean you should take the first deal that comes along. There are a few things you can do to prepare for an auto loan, including shopping for the best rate. Let's look at why bad credit means higher interest rates, and what you can do about it.

Why Does Bad Credit Equal High Interest?

Borrowers with bad credit typically only qualify for higher than average interest rates on car loans because of their past credit behavior. Bad credit doesn't mean that you can't get a loan. It also doesn't mean you have to settle for the first loan offer you're given.

Bad credit – defined by Experian as anyone with a credit score of 600 and below – can happen for any number of reasons. Typically, you have bad credit that's either situational or habitual. Situational bad credit is defined by an event that drags down your previously good credit score, such as the loss of employment or unexpected medical expenses.

Habitual bad credit, on the other hand, is marked by factors such as continuous late payments, unpaid bills, multiple bankruptcies, and repossessions. Habitual bad credit is reflected in your credit reports as a spotty credit history, with poor long-term financial habits. If you find yourself in this type of situation, it's a good bet that any auto loan you qualify for will have a higher than average interest rate.

Finding Your Best Interest Rate

Even with bad credit, you can, and should, negotiate the best loan terms you can – including the lowest interest rate. Before you start looking for a car loan, make sure you know your credit score, and what's on your credit reports. Knowing your score allows you to accurately research the average interest rates for people in similar credit situations. This way, you can tell if you're getting a fair rate from a lender or not.

In order to get the best interest rate for your credit situation, you should rate shop. Rate shopping is when you apply for several loans of the same type in a short amount of time – typically 14 days – in order to minimize the impact to your credit score. When you rate shop, the credit bureaus can see that you're looking at the same type of credit, and this allows multiple credit inquiries to count as one hard inquiry, rather than several.

In researching average rates during rate shopping, you may find that the interest rate you qualify for is higher than you're willing to pay. If so, you may need to improve your credit before shopping for an auto loan.

Improve Your Credit before Financing

There are several ways you can build your credit before applying for a car loan. The easiest way is to simply pay all your bills on time.

Checking your credit reports for accuracy is also important, because disputing errors and cleaning up entries can also raise your credit score. If you do find any errors – such as incorrect listings, accounts that should have been removed from your reports, or accounts that aren't yours – contact the reporting credit bureau to have them removed.

You can also build credit with a secured credit card, or by becoming an authorized user on someone else's credit card. A secured credit card works like a standard credit card, except you make a deposit which becomes your credit card’s limit.

Becoming an authorized user gives you the credit building benefits of paying a credit account on time and the account’s history, without the actual responsibility of making payments. When you become an authorized user, you may or may not get a card of your own. If you do, be sure you set up an arrangement with the primary cardholder so you don't charge more than you can afford to pay.

An Auto Loan Can Improve Your Credit Too

If you can't wait to get a vehicle, that's OK. There are special lenders – called subprime lenders – that help people get auto loans even if their credit isn't ideal. Because you're still going to be facing a higher interest rate, make sure the loan is as short as you can comfortably afford. It's important to balance your monthly payment and overall loan term so you don't end up paying more than necessary in interest charges.

The good news is that each full, on-time loan payment you make has the potential to help improve your credit score. This means you may have better luck shopping for a lower interest rate the next time around!

If you don't know where to turn for the bad credit car loan you need, let us help. Here at CarsDirect, we work with a nationwide network of special finance dealerships that have the lending resources you need.

Let us match you to a local dealer. Get the process started right now by filling out our quick and easy auto loan request form now!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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