Can I qualify for an auto loan with bad credit?

Buying a new or pre-owned sedan, SUV, truck, or minivan can be a long and frustrating process. Finding the best vehicle to fit your budget and personal expectations takes time, research, and a low-interest auto loan, so many people turn to credit unions to finance their used or new vehicle purchases. Credit unions provide convenient, quick ways to obtain auto loans, even for those with lower credit scores or little to no credit history. 

Although vehicle sales have decreased in 2021 due to ongoing supply chain issues, more than 39 million pre-owned and 14 million new vehicles were purchased in the US last year, even amidst travel restrictions and COVID-19 shutdowns across the nation. 

How to get an auto loan if you have bad credit

Credit unions are great places to go for auto loans if you have poor credit or little to no credit history. There are currently more than 5,000 credit unions throughout the US, with 203 of those located in Texas. 

Your local credit union may provide extra vehicle protection features to members at significantly lower rates than banks, such as multi-shield coverage, extended warranty, disability insurance, and GAP insurance. Credit unions may even offer smaller loans to purchase pre-owned vehicles to members. Many banks will only issue loans for newer vehicle purchases. 

Not sure how to obtain an auto loan when you have bad credit? Here’s how to get started: 

1. Check your credit score. 

Before applying for an auto loan, check your credit history. You can request a free copy of your credit report once per year from all three credit reporting bureaus: Equifax, TransUnion, and Experian. 

What qualifies as a poor credit score when seeking an auto loan? According to the credit reporting bureau Experian, a fair credit rating falls between 580 to 669, whereas a poor credit score falls between 300 to 579. 

Your credit union will also examine your current income, credit payment history, debt-to-credit ratio, length of credit history, and any outstanding debt, previous bankruptcies, or accounts in collection. 

2. Determine how much you can afford.

It’s essential to set a realistic budget for your auto loan. Take into consideration the car’s total cost of ownership. Gas, tires, maintenance, parking expenses, vehicle taxes, and more can add up quickly. To determine how much you can afford to pay toward a vehicle each month, use a loan calculator to factor in the interest rate and length of your loan. Remember that even though a longer auto loan may lead to lower monthly payments, you will pay more interest in the long run. 

3. Get pre-approved.

Although getting pre-approved for a vehicle loan with poor credit may be somewhat complicated, it will help you set a budget by giving you a general idea of how much you’re likely to receive and at what interest rate. Pre-approval can also speed up the buying process by helping you negotiate a lower price at car dealerships or with private sellers. 

What is pre-approval? Pre-approval means that your bank or credit union has examined your credit rating and history — along with other personal information — to get an idea of the total loan amount and the interest rate you will likely receive. 

TIP: When purchasing from an auto dealership, don’t let your salesperson know that you’re pre-approved until they give you the vehicle’s price. Dealerships often earn their profit from financing vehicle purchases at or above MSRP. Letting them know you’re already pre-approved may lower your chances of securing a better price. 

Pre-approval fast facts: 

  • Pre-approval is a hard credit pull, which may temporarily reduce your credit score. 
  • You will likely receive the available offered rate, and the vehicle you’re buying must also meet certain stipulations.

4. Make a down payment.

Making a down payment upfront can lower the overall cost of your credit union auto loan. It also means you won’t have to borrow as much when purchasing your car. However, because the credit union takes on risk when issuing you a loan, not making a down payment can lead to a higher interest rate. 

How much should your down payment be? Although it may not be possible for everyone, it’s recommended to put down at least 20% of the vehicle’s total price. For a used car, a 10% down payment may suffice. 

Don’t forget to factor in additional closing costs and fees required in Texas, which are added to the standard presumptive value (SPV) of all vehicles: 

  • Title transfer fee: A fee of $28 or $33, depending on the county.
  • Sales tax: A 6.25% tax on top of the vehicle purchase or SPV.
  • Use tax: A 6.25% use tax is applied to vehicles purchased outside Texas and brought into the state or used for business purposes.
  • Tag and license fee: The base fee is $51.75, the local fee is up to $21.50.
  • Transfer registration fee: A fee of $2.50.
The car-buying process can seem daunting, especially if you have a low credit score or little to no credit history.