What happens when you want a car loan but you have bad credit? Keep reading to find out

In this article

• What is a bad credit car loan?

• Can you get a car loan with bad credit?

• How do lenders assess bad credit loan applications?

• How to compare bad credit car loans?

• Loan term

• How to apply for a bad credit car loan?

• What should I consider before taking out a bad credit car loan?

• Alternatives to bad credit car loans

• Conclusion

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Credit rating plays an important role when you approach a lender for a car loan. After all, it is your credit score and credit record that gives an indication of how you are as a borrower.

However, having a bad credit score doesn't have to be a hurdle if you want to borrow money to purchase a car. You can always opt for specialised loans called bad credit car loans.

Here's what you need to know about how to get approved for a car loan with bad credit:

What is a bad credit car loan?

Bad credit car loans are car financing loans specifically meant for borrowers with bad credit ratings.

Since such borrowers are considered less creditworthy, getting approved for traditional car loans is usually difficult. That's why there are lenders in the market who specialise in dealing with borrowers with lower credit scores and lend them money.

Compared to regular loans, bad credit car loans charge a significantly higher interest rate. Some lenders may also require additional security to minimise the risk of lending to a high-risk borrower.

Can you get a car loan with bad credit?

A bad credit score doesn't automatically prevent you from getting a car loan. There are car loans with bad credit in Australia that are specifically targeted toward borrowers with less than perfect credit histories. Lenders providing these loans consider a range of factors while deciding on your loan application and view your credit score to be only one of them.

Getting a car loan with bad credit comes at a price since a low credit score makes you a riskier borrower. For instance, the interest rate tends to be higher than what's charged when the borrower has a good credit record.

What credit score do you need for a car loan in Australia?

There is no single pass-or-fail number that applies to every lender, but understanding where your score sits on the main credit-bureau scales can give you a realistic picture of your approval odds and likely interest rate.

What is the minimum credit score for a car loan in Australia?

Most mainstream lenders prefer applicants with an Equifax score above 660 (the "good" band) or an Experian score above 500. Specialist bad-credit car loan providers, however, may consider borrowers with scores in the "average" or "below average" range - roughly 460-660 on the Equifax scale and 300-499 on Experian. Some will consider scores lower still, provided other parts of the application are strong, such as stable employment and a sizeable deposit.

Can you get car finance with a credit score below 300?

A score below 300 on either the Equifax or Experian scale sits in the lowest possible band and signals serious adverse events such as defaults, court judgments, or bankruptcy. While it is not impossible to obtain car finance at this level, your options narrow significantly. Lenders that do consider very low scores typically require a secured loan against the vehicle, a larger deposit (often 20-30 per cent of the purchase price), and proof of consistent income over the preceding six to twelve months. Interest rates at this tier can exceed 20 per cent per annum, so it is worth checking whether improving your score first - even by a small margin - would open up better deals.

How do Equifax and Experian score bands affect car loan eligibility?

Australia's two main credit bureaus use different scoring models. Equifax and Experian scores both range from 0 to 1,200, but each bureau sets its band boundaries at different points. A score that looks low on one scale may sit in a different risk band on the other. Most car loan lenders pull data from at least one bureau - some check both. Knowing your score on each scale helps you target lenders whose criteria you are more likely to meet. You can check your Experian score for free through ClearScore.

Does a higher deposit offset a lower credit score?

Yes, in many cases it does. A larger deposit reduces the loan-to-value ratio, which lowers the lender's risk. For borrowers with a bad credit score, putting down 10-20 per cent or more can improve the chances of approval and may secure a lower interest rate. It also means smaller monthly repayments and less total interest paid over the life of the loan.

How do lenders assess bad credit loan applications?

Lenders only extend low credit loans to a suitable borrower, and they consider a range of factors to decide suitability. These include:

Credit history

Your credit score and credit report give a reasonably good idea to the lender about your repayment record. If your credit history is poor and you have defaulted several times in the past, the lender may decline your loan application or approve it subject to fulfilment of other conditions.

Income

Your income is an important factor in deciding on bad credit car finance applications. Lenders want to know how much disposable income is available for loan repayment. Your salary, investment earnings, and benefits from the government count towards calculating your income.

However, someone who is solely surviving on benefits and doesn't have any other source of income such as salary or investment earnings may not find it easy to get approved for bad credit car loans.

Expenses

Lenders will also factor in your day-to-day expenses. This also includes your other outstanding debts and credit card bills. It helps the lenders understand how your current payment obligations stack up against your income.

Loan amount

The loan you are borrowing is also a crucial factor. For instance, if you want to borrow a smaller amount to buy a pre-owned car, your chances of getting approved for a car loan with bad credit are higher compared to borrowing a large amount of money for a luxury vehicle.

How to compare bad credit car loans?

Comparing bad credit car loans in Australia makes it easier to find the best one suited to your needs. Here's what you need to keep in mind while analysing different offers:

Interest rate

The interest rate on any loan is an important factor as it decides the total cost of borrowing. When comparing car loans for borrowers with lower credit scores, check what rate you are being offered and compare it against other offers. Ideally, you should go for the lowest interest rate so that the repayment amounts are affordable. Also, keep in mind that interest rates for unsecured loans tend to be higher than for secured loans.

Loan term

The loan term can be anywhere between 12 months to 7 years. A shorter term means saving on interest payments and paying off your debt quickly. However, it can also mean larger monthly instalments. In contrast, opting for a longer term can reduce the monthly instalment, but it also means paying more interest.

Fees

It is not unusual for lenders to charge fees on car loans for bad credit, over and above the interest rate. These include administration and establishment fees. Some lenders may also charge prepayment penalties for paying off your loan ahead of scheduled maturity. Fees can add up and increase the overall cost of borrowing.

So make sure to check how much you will be charged as fees.

Repayment schedule

You may want to make extra repayments every month and prepay your car loan for bad credit to become debt free sooner. Some lenders may have strict restrictions against changing the agreed repayment amount and schedule.

Bad credit car loan costs: how to estimate your repayments

Understanding the real cost of a bad credit car loan before you sign helps you avoid repayment stress down the track. Below are worked examples using representative rates so you can benchmark any quote you receive.

Worked example: monthly repayments on a $20,000 and $40,000 loan at typical bad-credit rates

Bad credit car loan interest rates in Australia generally fall between 12 and 22 per cent per annum, depending on your score, deposit, and whether the loan is secured. As a rough guide, a $20,000 secured car loan at 15 per cent over five years (60 months) would cost approximately $476 per month, with total interest of around $8,560 over the life of the loan. Scale that up to a $40,000 loan on the same terms and the monthly repayment rises to roughly $951, with total interest close to $17,120.

If your rate sits at the higher end - say 20 per cent - that same $40,000 loan over 60 months jumps to about $1,060 per month and more than $23,500 in total interest. These figures illustrate why even a small reduction in rate makes a meaningful difference to your hip pocket.

How the loan term changes total interest paid

Choosing a longer loan term lowers your monthly instalment but increases the total interest you pay. For example, on a $20,000 loan at 15 per cent: a three-year term costs roughly $693 per month with about $4,950 in total interest; a five-year term drops to $476 per month but total interest climbs to around $8,560; and a seven-year term brings the monthly payment down to about $387 while total interest balloons to roughly $12,500. If your budget allows, a shorter term saves you thousands.

Why the comparison rate matters more than the headline rate

The advertised interest rate does not include establishment fees, ongoing account-keeping charges, or other costs that vary between lenders. The comparison rate rolls most of these into a single annual percentage, giving you a truer picture of the loan's total cost. In Australia, lenders are required to display a comparison rate alongside their headline rate. When evaluating bad credit car loan offers, always compare like for like using the comparison rate rather than the headline figure - the difference can be one to two percentage points or more.

How to apply for a bad credit car loan?

Applying for car loans with bad credit can be more difficult than applying for a car loan when you have a high credit score.

Here's what you can do to improve your chances of getting approved:

Know the lender's eligibility criteria

Lenders providing loans with bad credit have their unique eligibility criteria. Knowing whether you fulfil the requirements can help you save time and ensure that you don't approach lenders who are unlikely to give you a loan. For instance, for some lenders, a bad credit score could mean any score below 660, whereas, for others, it could mean scores below 600. Know your current credit score, so you have a clear idea of where you stand and which lenders are likely to approve your application.

Most lenders expect you to fulfil these basic requirements:

• have a steady source of income

• be 18 years or above

• be an Australian citizen or a permanent or temporary resident as per Australian laws

Gather all your documents before you apply

Every lender providing car finance for bad credit requires various documents supporting the application. These include salary slips, bank statements, tax returns, proof of receipt of benefits, proof of identity, and proof of residence.

Keeping all your documents organised before you apply for a car loan bad credit helps avoid any last-minute rush.

Bank with your preferred lender

Based on the eligibility criteria of various lenders and an assessment of your financial situation, you may feel that you are unlikely to be approved for a car loan. In that case, it might make more sense to approach your current bank with whom you have a long-standing relationship.

Depending on your payment track record, they may be more likely to extend you a loan even when you have bad credit. In fact, some may even extend car loans for bad credit with instant approval.

What should I consider before taking out a bad credit car loan?

Before you approach any lender for bad credit car loans in Australia, make sure to check that they are licensed to lend. You don't want to apply for loans for bad credit online only to discover that your documents have been used for identity theft.

Spend considerable time comparing the various options available. In particular, pay attention to the interest rate, repayment instalment, and additional fees, if any. These factors determine which is the best car loan for bad credit for you, as you should be able to afford the loan you want to borrow. Use a car loan calculator to compare your options by varying the interest rate, loan amount, and term to determine the suitable option for you. Consider whether you want to opt for a variable loan where the interest rate changes over the term of the loan or a fixed one where it remains the same throughout.

Keep in mind that when it comes to bad credit car loans, there is no guaranteed approval in Australia. A legitimate lender evaluates your application and considers several factors before sanctioning the funds. Anyone who promises guaranteed sanction is best avoided.

How to tell if you'll get approved for a bad credit car loan

Before you submit an application - and risk adding another enquiry to your credit history - run through a quick self-assessment to gauge your chances.

Quick self-assessment checklist before you apply

• Steady income: Can you show at least three to six months of consistent employment or regular income deposits in your bank statements?

• Manageable existing debt: Are your current repayments (credit cards, personal loans, buy-now-pay-later) low enough that you can comfortably add a car payment?

• No recent defaults: Have you avoided any new defaults, court judgments, or bankruptcy events in the past 12 months?

• Deposit available: Do you have at least 10 per cent of the vehicle's purchase price saved for a deposit?

• Correct credit report: Have you checked your credit report for errors that might be dragging your score down unnecessarily? You can check your credit score for free with ClearScore.

If you can tick most of these boxes, you may meet some specialist bad-credit lenders' basic criteria. Lender criteria vary and each application is assessed individually.

The income-to-repayment ratio lenders look for

Most lenders apply a debt-to-income (DTI) assessment. As a general rule, your total monthly debt repayments - including the proposed car loan - should not exceed roughly 30 to 40 per cent of your gross monthly income. If you earn $4,000 per month before tax, that means your combined repayments ideally stay below $1,200 to $1,600. Exceeding this range does not guarantee a decline, but it significantly reduces the pool of lenders willing to approve you.

What is the 50% rule and does it apply to car finance?

The 50 per cent rule is a budgeting guideline suggesting that no more than 50 per cent of your after-tax income should go toward essential fixed costs such as rent, utilities, insurance, and loan repayments. While it is not a formal lending criterion, many responsible-lending assessments arrive at a similar threshold. If your car loan repayment pushes your fixed costs above half your take-home pay, lenders may view the commitment as unaffordable - and you may find the repayments stressful to maintain even if you are approved.

Common auto-decline triggers to avoid

• Multiple recent credit enquiries: Applying to several lenders in a short period signals desperation and lowers your score. Space applications out and focus on lenders whose criteria you already meet.

• Undisclosed debts: Lenders cross-check your application against your credit report. Omitting an existing debt is a red flag that can result in an immediate decline.

• Inconsistent personal details: Mismatched addresses, employment dates, or income figures across your application and supporting documents slow down processing and raise fraud concerns.

• Applying for too much: Requesting a loan amount well above what your income supports is one of the fastest routes to a decline. Borrow only what you need and can realistically repay.

Alternatives to bad credit car loans

If you are unable to get car finance with bad credit, here are some alternatives you can consider:

Dealer finance

Car dealers may be willing to provide car loans with bad credit. These work similar to a bank loan. The only exception is that sometimes the dealer may want the borrower to make a balloon payment towards the end of the loan term. Once the payment is made, ownership of the car vests with the borrower.

Similar to lenders, dealers also conduct a credit check. However, they are unlikely to reject a borrower simply on account of bad credit. They may charge significantly higher interest on car loans for people with bad credit to square off the increased risk.

Guarantor car loans

Getting a guarantor is another option if you are unable to get approved for a car loan with bad credit. A family member can act as a guarantor for a car loan with bad credit. The guarantor has the responsibility to ensure loan repayment in case the borrower defaults.

This is useful for a lender as it helps them to minimise the risk by shifting the burden of payment to the guarantor in case of default. However, non-payment on the part of the guarantor can bring down your score even further. So be careful who you approach.

Bad credit car loan lender types compared

Different lender types suit different circumstances. The table below summarises how the main options stack up for borrowers with lower credit scores.

No single lender type is universally "best" for bad credit borrowers. The right choice depends on how urgently you need the car, how much deposit you can put down, and whether you prioritise a lower rate or a higher chance of approval. Comparing offers from at least two or three different lender types gives you the clearest view of what is available.

Conclusion

What is bad credit for car loans varies depending on the lender you approach. However, finding a lender to provide car bad credit financing is still possible.

Sign up with ClearScore to check credit score and get your free credit report. Armed with a better score, you can land the best deals suited to your requirements.