Should I Finance a Car if My Credit Score is Below 600?

Financing a car can be a daunting task, especially if your credit score is below 600. While it’s not impossible to secure a car loan with a lower credit score, it does come with its own set of challenges and considerations. Here’s what you need to know before making a decision.

Understanding Your Credit Score

A credit score below 600 is generally considered subprime, meaning lenders view you as a higher risk. This can result in higher interest rates and less favorable loan terms. According to Experian, borrowers with scores between 501 and 600 can expect an average annual percentage rate (APR) of around 12.85% for new cars and 18.97% for used cars¹.

Pros of Financing with a Low Credit Score

1. Build Credit History: Successfully managing a car loan can help improve your credit score over time.
2. Immediate Need: If you need a car urgently for work or personal reasons, financing might be your only option.
3. Special Financing Options: Some dealerships offer special financing programs for buyers with low credit scores.

Cons of Financing with a Low Credit Score

1. Higher Interest Rates: Expect to pay significantly more in interest over the life of the loan.
2. Larger Down Payment: Lenders may require a larger down payment to offset the risk.
3. Limited Loan Options: Fewer lenders may be willing to work with you, limiting your choices.

Tips to Improve Your Chances

1. Check Your Credit Report: Ensure there are no errors that could be affecting your score.
2. Save for a Down Payment: A larger down payment can improve your chances of approval and reduce your loan amount.
3. Consider a Co-Signer: Having a co-signer with good credit can help you secure better loan terms.
4. Shop Around: Different lenders have different criteria, so it’s worth comparing offers.

Alternatives to Financing

1. Buy a Less Expensive Car: Consider purchasing a cheaper, used car that you can afford to buy outright.
2. Improve Your Credit Score: Take some time to improve your credit score before applying for a loan.
3. Lease a Car: Leasing might be an option, though it also comes with its own set of challenges for those with low credit scores.

Conclusion

While financing a car with a credit score below 600 is possible, it’s important to weigh the pros and cons carefully. By taking steps to improve your credit score and exploring all your options, you can make a more informed decision that best suits your financial situation.