What Interest Rates are Typical for Bad Credit Car Loans?

By Angela Monroe - June 13, 2019

Bad credit car loans have higher interest rates than standard car loans, typically around 10% to 18.12% or higher.

The average credit score is around 620 to 679, although many lenders still consider this score range on the poor side. A low credit score generally falls between 580 to 619. Anything below this range is bad. The lower the credit score, the higher the interest rate of the loan.

Credit Scores

While a car loan’s interest rate is also affected by other factors like the down payment, loan term and car type, your credit score has the greatest influence. Also, if the loan is secured against the car, the interest rate is further affected by how quickly the car depreciates.

Here’s an estimate of interest rates based on FICO’s credit score ratings:

Credit Score

Score Rating Interest Rate (New Car) Interest Rate (Used Car)

800-850

Exceptional 4.21%

3.85%

740-799

Very Good/High 4.26%

4.07%

670-739

Good/Average 6.7%

6.36%

580-669

Fair/Low 13.6%

12.19%

300-579 Poor/Bad 17.92%

16.58%

 

Because of the high interest rate that comes with having a terrible credit score, it’s smart to improve your credit profile first before applying for a car loan. If there is an immediate need to secure car financing, shop around for better deals and compare interest rates and loan terms.

Down Payment

A bad credit car loan usually requires a down payment of at least $1,000 or 10% of the vehicle’s selling price, whichever is less. By putting your own money on the line, you offset the risk factor that’s associated with your bad credit. The funds you provide assures the lender of your commitment to pay the loan.

You can pay the down payment requirement by paying cash, using trade-in equity or a combination of both. If you can provide more than the minimum down payment requirement, do so. Ideally, a down payment that’s around 20% of the car’s selling price or higher is recommended. The larger down payment reduces interest charges and make financing more affordable.

Other advantages of providing a large down payment include:

  • Shorter loan terms
  • Smaller monthly payments
  • Reduced negative equity
  • Stronger loan commitment

Balloon Payment

If you do not have enough funds for a down payment, get a car loan with a balloon payment scheme. A balloon payment is a large final payment that’s due at the end of the loan term following smaller monthly payments. This setup lowers the initial monthly costs without lengthening the loan term, which keeps you from paying more in interest. It provides an advantage if you’re expecting to earn or make more money in a few years.

Collateral

A bad credit car loan usually requires the car to be purchased as collateral. Because the vehicle is secured against the loan, the lender can repossess and sell it to recover the money if you default on the loan. Thus, you have a compelling reason to repay the loan on time. This dynamic reduces the risk factor for lenders, which allows them to lower the interest rate of your loan.

Co-Signer

The interest rate of a bad credit car loan is higher than a standard car loan, but it can be significantly reduced with the presence of a co-signer.

Their impressive credit history will be used by the lender as bases for your loan approval, as well as of the interest rate and terms of the loan.

Loan Term

Generally, the longer the length of your car loan, the higher your interest rate will be. This is not a smart move for a bad credit car loan because you’ll be paying its substantial interest for a longer period of time. In the event of unemployment or any other circumstances that leave you with insufficient funds, you might not be able to catch up with the monthly repayments. This will put you at great risk of loan default and car repossession.

 

Get approved for a car loan that’s tailored to your specific financial circumstances at Loans For People With Bad Credit. Fill out the Bad Credit Loan Pre-Approval or call us on 1300 769 384.

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

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