Consumer Car Buying Advice Blog

There are three main types of lenders that will finance consumers with bad credit and we explain all three in this article.

An introduction

At Auto Credit Express we’ve spent the last 20 years dealing with consumers with credit problems. As part of our business, we have helped many of our customers raise their credit scores and reestablish their car credit by financing a vehicle with a bad credit auto loan. Along the way, we try to educate these applicants on the bad credit car loan process as well as the different types of lenders that are involved with these types of transactions.

What we’ve learned along the way is that the key to a successful bad credit car loan is focusing on the basics. In order to rebuild your credit, you, as a bad credit car loan customer need to understand how the subprime loan process works, which includes an understanding of the different types of lenders that are active in the subprime auto loan market.

Direct bad credit lenders

Direct lenders are, as the name implies, banks and other lending institutions that lend money directly to the consumer. When you are approved for a loan from a direct lender, you can shop for a car like a cash buyer without having to be concerned about whether or not the dealer can get you financed.

One of the disadvantages of direct lenders, however, is that most have stricter underwriting guidelines. In other words, they don’t do a very good job of approving applicants with bad credit. Direct lenders may finance the following loan types:

Private party auto loans – This type of loan deals with purchasing a car from a private party. Most direct lenders that deal with bad credit car loans do not offer this option.

Franchise dealership purchase financing – This type of car loan involves financing a vehicle purchased from a dealer that holds a new car franchise (such as Ford, Chevrolet or Toyota). All direct lenders that deal with bad credit car loans offer this option.

Independent dealership purchase financing – This car loan type involves financing a car purchased from an independent dealer with no new car franchise. Most, but not all, bad credit direct lenders with offer this option.

Car loan refinance – Some direct lenders will offer this finance option

Most direct lenders will also offer indirect lending through car dealers. When this is the situation, the lender will often offer the dealership slightly better “buy rates” than they offer their direct customers. The dealer can then choose to offer the customer this rate, or mark it up in order to earn additional profit.

Indirect bad credit lenders

This type of lending is the most prevalent when it comes to consumers with poor credit. The indirect lenders available to buyers can vary widely from dealership to dealership, which means that it is very important for bad credit car loan applicants to choose the right dealership before they begin the application process.

Bad credit lenders choose the indirect lending model for a couple of reasons:

• They have a reasonable assurance from the dealer that the vehicle being financed is in good repair

• They are able to charge the dealer a fee when they purchase the finance contract

More indirect bad credit auto loan lenders deal with franchised dealers than with independent used car lots. Common examples of indirect lenders include Ford Motor Credit, GMAC, Toyota Financial, and American Honda Financial Services (it should be noted that these are examples of indirect lenders, not necessarily lenders that deal with bad credit car loans).

In-house lenders

Also called “buy here pay here” or “tote the note” lenders, these are franchised dealers and independent car lots that lend money directly to the consumer, often with weekly repayment terms. Many of these dealers use a third party to process the loans and collect the payments.

Dealers that offer this type of financing may also offer no credit check auto loans. If you have a stable job and can afford a car payment, many of these dealers may lend you the money to buy one of their own vehicles in inventory without checking your credit report.

The bottom line

The type of lender that you’ll deal with if you have bad credit depends upon a number of factors including your credit score and where you choose to purchase a car. Above is a comparison chart of the lender types as well as the services they offer.

One thing to remember is that for nearly 20 years, Auto Credit Express has been helping people with credit problems get approved for new and used bad credit car loans. Our dealer affiliates work with a broad spectrum of bad credit auto lenders to get you approved.

For more information, please visit www.autocreditexpress.com to see what we can do for you.

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