If you’re looking for a car and your credit history is shaky or worse, you’ll see many dealerships with signs proclaiming “no credit, no problem”, “buy here, pay here”, “no credit check,” or “we welcome bad credit.”
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It’s no secret that traditional lenders like banks, credit unions, and car dealer financing agencies charge higher interest rates to low credit borrowers. But if your credit is bad enough, they probably won’t work with you at all.
This makes dealerships with or without credit all the more attractive to buyers with poor scores. But are they legit and do they offer good deals? Or are there better alternatives? Here’s what you need to know.
This should be a last resort
According to the Consumer Financial Protection Bureau (CFPB), lenders like banks and credit unions limit the amount of money they lend based on the value of the vehicle the borrower is buying.
But these limits do not apply to dealers who act as their own banks.
Buy here, pay here, dealers can lend money based on an inflated price that is higher – much higher, in some cases – than the car’s actual value. This means that buyers often end up borrowing thousands of dollars more than the car is worth, and they can also expect to be hammered by finance charges.
According to Experian’s State of the Auto Finance Market Report: Q2 2022, here are the average used car loan interest rates by credit score:
- 781 to 850: 3.71%
- 661 to 780: 5.58%
- 601 to 660: 10.48%
- 501 to 600: 17.29%
- 300 to 500: 20.99%
As you can see, subprime borrowers can expect to pay higher APRs than most credit cards – and non-franchised dealerships can charge even more.
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It’s normal for the course when your credit is bad
It may seem unscrupulous to rush people who need help the most, but the fact is that bad credit makes life more expensive.
“The sad truth is that when you have bad credit or no credit, you’ll have a harder time trying to buy a car from a dealership than others,” said Geoff Cudd, consumer advocate and owner of FindTheBestCarPrice.com. “Dealers without credit are one of the limited options people with bad credit have when looking for a new car, but they are often predatory and take advantage of the fact that these people have fewer options by charging more, requiring larger down payments, or increase interest rates for financing options.
You’ll also likely have fewer inventory options, and CFPB advises that some bad credit/no credit dealerships install devices that disable the vehicles they sell to facilitate repossession if you miss a payment.
The benefits: you’ll get a car and a chance to rebuild your credit
Dealerships for people with bad credit have a few advantages. The most obvious is also the most important: they will work with you when no one else will.
“Car dealerships with or without credit are generally more lenient when it comes to credit scores,” said Joe Giranda, director of sales and marketing at Classic CFR. “If you have a lower credit score, you may still be able to finance a vehicle through one of these dealerships.”
Another benefit is that by getting financing – even if it’s on bad terms – you can repair your credit by making payments on time. Then, once your credit reaches prime or something close, you can refinance with a traditional lender at a lower rate.
Consider your options
Several experts have suggested saving up for a private sale instead, or finding a co-signer to help you secure traditional financing. You can also try borrowing from a low credit auto finance lender.
According to MarketWatch, here are the best bad credit auto lenders, which have varying minimum income and credit score requirements, and some have no minimum credit score requirements:
- Ally Clearlane
- Automatic approval
- Prestige Financial
- Capital one
Additionally, Carvana offers no-credit-check financing for most people making at least $4,000 a year, and CarMax offers options to “fit most credit profiles.”
If you choose to go with a bad credit dealer, be sure to educate yourself, shop around, and remember that as the party shelling out thousands of dollars, you still have leverage.
“The best way for people with low credit scores to buy from a dealer without credit is to do their research,” Cudd said. “Make sure you find a reputable dealer and don’t accept the first offer just because you think you won’t get a better one because of bad credit. Trust your instincts. If you feel like you’re the victim of a bad deal, you probably are.
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