Applying for a Bad Credit Auto loan

Once you have submitted your bad credit auto loan application and have received an approval, the bank will determine your budget. Guidelines for a bad credit car loan are much stricter than for a regular car loan. When you submit a credit application, the bank looks very close at your income and expenses. In fact, you will have to prove your income with pay stubs showing year to date income. You may also be required to prove how long you have been on the job with a W-2 from a prior tax year. Any additional income such as child support or disability needs to be verified with court documents and bank statements.

If you are approved, the lender determines your income relative to your monthly debts (called debt to income or DTI); it factors in such things as utility payments and car insurance and comes up with a payment that it believes you can afford. The lender will then place you in one of their tiered programs based on your credit score and credit history. This program will dictate the interest rate, contract term and down payment requirements. This information will then be sent to the dealer.

Once the special finance department receives the loan information from the lender, the finance manager will determine which cars in the dealer's inventory fit the requirements. With most lenders, the newer the car and the lower the mileage, the longer the loan term they will allow. So as you can see, the selection process is not as simple as it might seem.

Bad credit auto loans are also different from the customer's perspective. Most customers that have not financed a car with a subprime lender choose a car based on what they like - color, model or type. It could be a 5 year old sport utility vehicle with 70,000 miles on the odometer. Even though this particular vehicle may be clean and drive nicely, the interest will be higher due to its age, and a service contract (which you'll want, especially for an SUV) will also be more expensive. In addition, the term may also be shorter due to the mileage. In other words, it may look nice, but it also may not fit the payment - unless the customer can come up with a sizeable down payment.

By understanding the buying process, a bad credit auto loan customer can avoid being disappointed by avoiding the wrong kind of vehicle. Remember, the object is to get your credit back on track, not to get you your dream car. By sticking to the recommendations of the special finance manager and picking out the car that best fits your needs and not your wants or dreams, you will find that reestablishing your credit will be much easier and more affordable.