Is It Better To Buy a New or Used Car With Bad Credit?

If you are currently in a challenging credit situation, then you might be worried that you won’t qualify for an auto loan. Believe it or not, depending on your situation, you could potentially get approved despite having a low score. But if that’s the case, then is it better to buy a new or used car if you have bad credit?

Buying a new car

If you currently have a low credit score (620 or lower), then you might be apprehensive when it comes to applying for a new car loan. However, you do have some options. First, you’ll need to know how much of a monthly payment you can comfortably afford as well as how much of a down payment you can put. If you have bad credit, then having a large down payment is crucial when it comes to getting approved since the bank won’t have to cover too much of the cost of the car.

And when it comes to picking a car, you will be better off choosing the base trim level of your chosen model, since it will cost less. If you do get approved for a new car loan with bad credit, your interest rate will be high. Here are some example credit scores and associated rates that Edmunds put together:

Super prime781-850
Prime681-780
Nonprime601-680
Subprime501-600
Deep subprime300-500
The different types of credit scenarios | Edmunds.com

New-Car Loan:
Nonprime: 7.1 percent
Subprime: 11.4 percent
Deep subprime: 14.1 percent

As we can see, if your credit score is currently in the lower 600s or even the 500s, then you’ll likely be approved in the mid-to-high teens as far as your interest rate. But don’t let that scare you off. If you can afford the actual car payment comfortably, even at the high-interest rate, it could be a good move as far as building your credit. Also, the lender could be more likely to approve you on a new car since there’s less of a chance of it needing repairs or breaking down altogether.

Honda vehicles for sale at a dealership
Older Honda Accord models for sale | Justin Sullivan/Getty Images

Buying a used car

On the other end of the coin, buying a used car with bad credit is possible as well. However, if you end up going with a car that’s too old, or one with too many miles on the odometer, then you might be less likely to get approved by a lender. For example, if you have the choice between a four-year-old commuter car with 45,000 miles on it, versus an eight-year-old luxury sedan with 90,000 miles, which one would you choose?

Probably the latter, right? We wouldn’t blame you, but you most likely will have better odds of getting approved for the commuter car because the bank looks at it as less of a liability when it comes to repairs, which in turn means that you’ll be able to make the monthly payments for it as opposed to paying a hefty mechanic bill every other month.

Edmund’s noted that lenders use a complicated formula when deciding which cars to finance and that criteria can vary depending on the lender. That’s why, in some ways, you might actually stand a better chance of buying a new car.

Used cars are displayed on a sales lot on June 9, 2011 in San Rafael, California.
Used cars | Photo by Justin Sullivan/Getty Images

Choose the best of both worlds: Certified pre-owned

At the end of the day, if you can’t decide whether to buy a new or used car, then you can always have the best of both worlds by going with a certified pre-owned car. The criteria for a manufacturer to certify a pre-owned car varies, however, these cars are typically only a few years old and have fewer than 60,000 miles on them. What’s even better is that they go through a more rigorous inspection process and typically come with an extended warranty over the existing factory one.

Additionally, some manufacturers have special interest rates for CPO cars, so if you are in a bad credit situation, then this could be the best way to go as far as getting an approval. But, if anything, try not to get a that’s too old or with too many miles as you’ll have less of a chance despite the car’s lower cost.