Get Started with a Bad Credit Auto Loan

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You can never be too prepared for purchases as big as a car, especially if you're dealing with less than perfect credit. While most people know what bad credit is, not everyone understands what a bad credit auto loan is. If you're dealing with poor credit & need a vehicle, a subprime auto loan offers a way to get financed. It also gives you a chance to improve your credit as long as you make your loan payments on time each month.

Many dealerships aren't willing or able to work with borrowers with imperfect credit.

Auto Credit Express can help you find car dealerships for bad credit loans. We're here to help you make informed choices about auto financing. You can set yourself up for success with your bad credit car loan.

What is a Bad Credit Car Loan?

A bad credit car loan isn't like a traditional auto loan. There are different requirements you'll need to meet, and because not every dealer has a special finance department, finding a subprime lender to work with can be difficult. Bad credit car loans are designed for buyers with less than perfect credit or no credit. They're great for getting you on track in the credit world and back on the road driving.

If you're thinking of applying for a bad credit auto loan, you'll need to do some prep work. Make sure you have these three things covered:

  • Request your credit reports and check your credit score - You first need know where you stand with your credit. The majority of lenders look at your FICO credit score to determine your loan qualification. You're entitled to a free copy of your credit report once every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Make sure all the information is accurate, and dispute any errors with the appropriate credit bureau. Checking your credit score can help when you research the interest rates car buyers in similar situations are typically able to qualify for.
  • Budget - You can estimate how much car you'll be able to afford by taking a close look at your budget. There's more to car buying than the price of the vehicle itself, so make sure you can also afford the cost of repairs, insurance, and fuel. The last thing you want to happen when your credit is struggling is overextending yourself.
  • Prepare a down payment - Making a down payment on a bad credit auto loan helps you out in many ways. Most subprime lenders require a down payment, so saving up for one will help you get approved. Putting money down can also lower the amount of your loan, which leads to lower a monthly payment and reduced interest charges.

Preparation is key when it comes to buying a car. If you need a vehicle and poor credit is holding you back, we want you to understand that bad credit auto loans are designed to help car buyers just like you.

Many car lots work in a similar way. They believe that "your job is your credit," meaning as long as you can prove that you have a steady income and residence, you will be approved for an auto loan.

There are also new and used car dealerships that don't offer in-house financing, but will still accept low credit scores. These dealerships use third party lenders that know the ins and outs of subprime auto financing and, they likely can get you approved. Typically, these loans have slightly higher interest rates and shorter loan terms due to the risk the lender is taking on you.

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Typical Bad Credit Auto Loan Requirements

When you're faced with bad credit, getting a car loan isn't as simple as just picking out a new car, submitting a loan application, and signing the paperwork. Getting the financing you need while struggling with poor credit requires some additional steps and documentation. But the good news is that if you're serious about getting an auto loan, your credit doesn't always have to stand in the way. All you have to do is find the right lender and meet their qualifications.

While it's true qualifications required by subprime lenders for bad credit auto loans vary, there are guidelines that are typically followed. Some of these are basic: you must be at least 18 years old, a current resident and legal citizen of the United States or Canada, and have a valid driver's license.

Other requirements are more in depth, and need to be reviewed when you sit down with the finance manager at a dealership. These include, but aren't limited to:

  • Proof of income with a current computer-generated check stub showing a minimum monthly pre-tax income of at least $1,500 to $2,000 from a single source.
  • Proof of residency with a current utility bill in your name at the address listed on your application.
  • A minimum of six months at your current job, with at least three years of employment history and no major gaps in employment.
  • Proof of a working landline or contract cell phone in your name. Pre-paid phone plans aren't accepted.
  • A list of six to eight personal references with their names, addresses, and phone numbers.

Bringing these items with you when visiting a dealership is a great way to start the car loan process off on the right foot. However, these are just the basic requirements. Financially, there are a few more requirements you should be aware of before jumping into a bad credit auto loan.

First, subprime lenders typically need a down payment. Most will require at least $1,000 or 10 percent of the vehicle's selling price, whichever is less. Second, lenders want you to comfortably afford a car payment and auto insurance, as well as your other monthly bills.

To ensure this, lenders use two calculations: the debt to income ratio and payment to income ratio. Your debt to income ratio must be less than 50 percent, while your payment to income ratio can be no more than 20 percent in order to qualify for auto financing. Debt to income compares your monthly pre-tax income(s) to your total monthly bills, including a car and insurance payment. Payment to income calculates the percentage of your monthly income that goes toward your combined car and insurance payment. These ratios are easy to calculate yourself, and should be done as part of your budgeting before you step into a dealership.

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Situational Bad Credit vs. Habitual Bad Credit

Bad credit can be categorized into two different types: situational bad credit and habitual bad credit. When subprime lenders look at your credit profile, they'll take into account why your credit looks the way it does.

What is situational bad credit? - Situational bad credit is when your credit score drops due to something outside of your control. Many times, lenders who see car buyers with situational bad credit are willing to approve them for an auto loan. Examples of situational bad credit include:

  • Employment loss - If you were laid off from a job or you took a big cut in income.
  • Divorce - If a divorce ended badly for you financially.
  • Illness or injury - If an illness or injury left you with high medical bills, or time away from work.

What is habitual bad credit? - On the flip side, habitual bad credit is a spotty credit history due to poor long-term financial habits. Examples of habitual bad credit include:

  • History of late payments - The inability to make monthly payments on time is a big warning sign to lenders, especially if this extends over a long period of time.
  • Multiple bankruptcies - A single bankruptcy, though bad, is usually acceptable. Multiple bankruptcies on a credit report, however, are not.
  • Repossessions - If a repossession isn't included in a bankruptcy, or there are several appearing in your credit file, it's considered habitual.

It's important to have good credit practices, which means keeping up with your bills and payments. Lenders take your credit history seriously, so make sure you reflect on why your credit is bad and how an auto loan could help you on the path toward good credit.

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Rebuild Your Credit with a Car Loan

Did you know that an auto loan is a great tool to help turn around bad credit? In fact, poor credit doesn't have to be your enemy. Acknowledging your bad credit is the first step toward improvement. In order to take full advantage of the credit building potential of a car loan, you should know where your credit stands.

Knowing your credit score and what's on your credit reports is the only way to get an accurate snapshot of your overall credit profile. Your credit reports are made up of information about how you use credit now and have used it in the past, and your credit score is calculated using this information.

Most auto lenders use a version of the FICO credit score, and this is how it breaks down:

  • Payment History: 35% - Shows how you've paid your bills over the last 10 years.
  • Amounts Owed: 30% - Shows how much of your available credit you're using.
  • Credit Age: 15% - Shows how long you've been using credit based on the average age of your credit accounts.
  • Credit Mix: 10% Shows how you use revolving credit (credit cards), and installment credit (such as auto loans).
  • New Credit: 10% - Shows if you've recently been applying for multiple lines of credit all at once, which could be a red flag.

How does knowing this help you fix your credit, and what does it have to do with a bad credit auto loan? Because your credit score is low, lenders try and look beyond that into the specific reasons your credit looks the way it does. Believe it or not, once you're approved for an auto loan, it can help almost every aspect of your credit.

A car loan expands your credit mix by adding an installment account to it. Every payment you make on your loan on time and in full adds to your payment history. The more positive information you add, the higher your credit score rises. Your new loan should also add to the new credit reflected in your credit report.

An auto loan can last a long time, but just think of how much your credit can grow over its term. Plus, if you build on your positive payment history by paying all your other bills on time, your credit can really shine once you've successfully completed your car loan.

How to Buy a Car with Bad Credit

Having poor credit won't always stop you from getting an auto loan, but it does change the process of buying a car. One of the most difficult steps to getting a subprime auto loan is finding a dealership that's willing to work with you. Many lenders and dealers aren't very flexible when it comes to helping people buy a car with bad credit.

Traditionally, lenders use your credit score to qualify you for an auto loan, and their processes may call for an automatic turn down if it's low. However, certain bad credit auto lenders are willing to work through challenging situations because they base approvals on your income, employment, and other factors in addition to your credit.

Because of the smaller number of lenders that offer subprime car loans, the process of buying a car with bad credit is different. Instead of finding the car you want, you'll want to get approved for financing with a bad credit auto lender first before worrying about your vehicle choice.

The tricky part of buying a car with bad credit is that you can't directly apply with most subprime lenders. Instead, they're indirect lenders that only work through certain dealerships with special finance departments. These bad credit car dealerships often are your best chance to get approved, and Auto Credit Express can connect you with one in your area.

Car Dealerships for Bad Credit Near You

Before you head to a dealership, you can try to get financing through a bank or credit union you have a current relationship with. Although it can be hard to get pre-approved if your credit score is poor, it doesn't hurt to try. If you get turned down, the next step is finding a local dealership that offers bad credit car loans. These dealers have a special finance department and work with subprime lenders that cater specifically to credit-challenged car buyers. Once you apply through one of these dealerships and get approved, you can continue with the car buying process.

It may sound easy, but finding a dealership that has these resources can be tough. At Auto Credit Express, we know how difficult it can be to get the financing you need when you're struggling with credit. That's why we want to help you get started today. We work with a nationwide network of dealers that know how to handle unique credit situations. Let us help you find a car dealership for bad credit near you. Get started by filling out our no-obligation, free auto loan request form now.

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