Simply explaining the bad credit auto loan process is not easy. While the process of applying can take just minutes, it takes slightly longer to understand how your unique credit situation applies so you can make the best choice that will save you money and help rebuild your credit score.
Because owning a car is the second most expensive thing we will do other than owning a home, making an informed choice is especially critical for people who have poor credit.
For those new to the process, a bad credit car loan is when an individual with a credit score that is considered subprime applies and receives an auto loan. A subprime credit score is usually considered any FICO score below a 640. People with such scores are considered a "high risk", and are often denied by traditional lending sources.
Because they are denied by traditional lenders such as local banks, credit unions, or lending arms of car manufacturers such as Ford Credit or GMAC, people with low credit scores are often forced to seek financing through alternative options. Such options often include local automobile dealers and/or local finance companies which are likely to charge them a higher interest rate to offset the higher risk of defaulting on the loan.
If you do not know what your credit score is, the Fair Credit Reporting Act entitles you to a free copy of your credit report once every twelve months through annualcreditreport.com. We here at Auto Credit Express highly encourage potential car buyers to read and be aware of what their credit report says before applying. And be sure to check your credit report for errors to avoid being penalized for old information.
While there is no nationwide standard, here at Auto Credit Express the typical requirements for someone applying for a vehicle loan are as follows:
Gross income refers to an individual's pre-taxed monthly income. This income should be verifiable through proof of income such as tax records. Fixed income such as Social Security, Disability Insurance, Child support, Alimony, or Public Assistance should be included in your monthly income.
At least $1,500 gross income is required, and a suggested $1,800 monthly income is recommended for most credit situations. Seasonal employees or temporary employees at their agency for less then six months would not qualify. The rest is fairly self explanatory as we only have bad credit car dealership networks in United States and Canada, and you must be a legal adult for contractual purposes.
"They made me feel like my credit was not a problem from the first step in the door." Jerdina C., Detroit
First, score plays a big part in regards to how a dealer or lender views your credit. Especially depending on what credit range you fall into on the chart below. Say for example you're in the below average credit range with a 570 credit score. While some people may tell you that you have bad credit, it is still not the same as those who have truly bad credit of less then 500.
Also, not all bad credit is equal when it comes time to apply for a low credit score vehicle loan. Lenders will often separate bad credit into two profiles: situational and habitual credit. For example, if one has low income, a spotty job history and missed many payment deadlines, they would be viewed as habitual and thereby viewed an unfavorable risk.
However someone who has a higher average income, a good job history and generally makes all their payments until an unexpected event occurs, such as divorce or major illness, may be viewed more favorably. Even if both parties had similar credits scores. Why? Less perceived risk. Many lenders believe that someone who habitually misses payments is likely to keep missing payments in the future.
Below are some examples of situational bad credit and habitual bad credit.
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After filling out an online auto loan application, a lender or loan matching service will generally scrutinize their network to find a dealership that is willing to work with you depending on how poor your credit score is. Not every dealership is willing to accommodate someone who can only swing a low down payment or has had a previous repossession, or has the will and the means to work with someone currently engaged in the bankruptcy process.
Because of this hesitation, loan matching services like Auto Credit Express, which have a vast dealer referral network that stretches from coast to coast, offers car buyers more dealers and therefore a better chance at success. Once paired with a dealership, the customer will begin the process of selecting a vehicle that will fit their needs and negotiating the terms of the contract.
If this sounds different then the typical 'shop the car first' mentality, you would be right. But because of the limited number of dealerships often willing to address the needs of customers with poor credit, finding a used car dealer with lower rates and a good inventory is a better path to success then chasing a dream car. Get your credit in order, and then chase after your dream.
So how does a poor credit auto loan get you closer to your dream car anyway? Well if you deal with someone like Auto Credit Express, who only deals with lenders that report your excellent payment history to the three major credit bureaus, then you can see some very positive gains on your credit report. Better scores mean a better rate in the future, which means your dream car is that much closer.
However, it's important to be mindful that many lenders, especially small lenders, do not always report your positive credit payments. Oh they are more then happy to report when you miss a payment, but only to make it that much harder for you to crawl out from under your heavy credit rating and stop being their high interest rate customer!
But what do you do if you aren't looking at your dream car, but cannot get your fixed income family of six into a budget five seat sedan? Obviously money is tight but you need just a bit more then your credit will allow. What do you do?
Larger Down Payment - By increasing the money down, you minimize the amount of risk to the lender should they have to come back and repossess the car for late payments. However, this can mean anywhere from putting a little more down, to putting down up to half the cost of the vehicle depending on how big of a gap you are trying to overcome!
And given the popularity of people asking for zero down payments, this is not an option most people can consider employing. Still, it's one that works, especially for people who suffer bad credit due to situational circumstances, and therefore should not be ignored.
Cosigners - This can be difficult, given that you must know a parent, family member, or friend who has good credit and trusts you enough to take on the risk of the loan with you. However, if you do know someone that will cosign the auto loan, you can save yourself thousands over the course of the loan and expand your options back to more traditional lenders.
Take a look at the following example based on a $15,000 auto loan.
|Months to Repay||20% Rate with no Cosigner||10% Rate with a Cosigner||Monthly Savings||Total Savings|
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