Forgoing a new car (with its high price tag and depreciation) in favor of a used one can be a smart choice for any car shopper. If your credit score doesn't fall into the 'excellent' category, buying a used vehicle can be even more advantageous. Shopping for a used car gives you more vehicle options and opens up opportunities to find the right auto loan rate or purchase a car in cash. We'll guide you to the best route for getting the reliable used vehicle you need in spite of your rocky credit history. 

Is it Easier to Buy New or Used with Bad Credit?

new or used car bad credit

Buying a used car when you have bad credit is typically the easier route mostly due to the lower average price. New cars depreciate by approximately 20% in the first year, and 10% in the next two years. With a used vehicle, the original owner takes on the bulk of depreciation which results in a lower price and monthly car payment. This will come in handy if you're hoping to get approved for an auto loan.

The auto financing process looks different for car buyers with subprime credit compared to those with good credit. A car shopper with good credit starts by selecting the vehicle they want to buy and then applies for financing at the dealership or through a bank. This process is flipped for shoppers with bad credit. The first step involves submitting a credit application with the dealer that is sent to several subprime lenders for review. When a lender agrees to approve the loan, they respond to the dealer with a maximum monthly payment they will approve. If the subprime lender agrees to approve your auto loan, you will need to select a vehicle that fits into the stated monthly amount. 

With the average price of a new car nearing $40,000, buying used will offer significantly more options to fit the requirement. According to ValuePenguin, car shoppers buying a new vehicle borrow an average of $32,480, while used car shoppers borrow an average of $20,446. The drawback to going with a used vehicle is that the available loan terms will be shorter since loan terms over 60 months are generally not allowed for older used cars.

Find a Great Deal on a Used Car

Getting a Used Auto Loan with Bad Credit

used car loan bad credit
Car buyers with bad credit will have to work harder for that auto loan stamp of approval.

Going to a traditional dealership isn't your only option when financing a used car with bad credit. Other avenues you can take include credit unions, Buy-Here-Pay-Here dealers, and online subprime lenders. Each of these options comes with their own set of pros and cons.

Credit unions are typically more flexible about working with car shoppers who have less than perfect credit and these lending institutions also offer lower interest rates. On the other hand, credit unions also require membership for account holders and some are exclusive to specific consumer groups.

Buy-Here-Pay-Here dealerships won't turn down car shoppers based on a low credit score but they typically come with high interest rates and restrictive payment terms. Subprime auto lenders offer second chance car loans and more flexibility for approval. They do, however, take the borrower's credit score and income into account and may not approve everyone. 

Beware of High Interest Rates 

interest rate by credit score
Used car interest rates for deep subprime shoppers can reach a staggering 20%. (source: Experian)

Although a lower price tag makes a used car easier to buy with bad credit, it also comes with higher interest rates than a new car. This is because the condition of used cars is much less predictable than new, posing a greater risk to the lender. The difference is less than one percent for super prime borrowers, but for deep subprime shoppers, buying a used car can yield an interest rate that's 6% higher than a new one. Getting pre-approved for auto financing from multiple lenders can help mitigate this risk and help you find the most favorable interest rates. 

Should You Buy a Used Car in Cash?buying a used car in cash

One simple way to avoid the stress of auto financing with bad credit is to save up enough to pay cash for a used vehicle. Affordable used vehicles can be purchased from private sellers, auctions, used car lots, and car shopping websites. Paying cash for a vehicle offers many benefits, along with a few drawbacks. On top of removing the roadblock of getting approved for an auto loan with bad credit, paying cash for a vehicle can save thousands in interest costs. 

On the flip side, the selection of used cars priced low enough to purchase with cash will be limited. For many car shoppers, taking this route means going with an older or high mileage vehicle, and forgoing some of the latest tech and safety features. Ultimately, you'll want to weigh the benefits and the risks of financing a used car with bad credit vs. paying for one outright. 

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