Understanding Your Options: Special Financing Explained

What is Automotive Special Financing?

Special financing is an umbrella term for lending or lease programs designed for customers who may not qualify for traditional financing. Customers with low FICO scores, recent bankruptcies or repossessions, or with difficult-to-prove incomes are all good candidates for special financing. While special financing can be a great way for low-credit or first-time borrowers to secure an auto loan, it's worth noting that it's not without its drawbacks. Special finance loans are typically associated with higher interest rates and down payments than traditional loans, and potentially unfavorable loan terms.

How Automotive Special Financing Works

Special financing lenders target customers who don't qualify for traditional auto loans. They do this by structuring the loans in a way that minimizes risk, which can entail shorter loan terms, higher interest rates, or even collateral requirements. While those aspects of special financing aren't exactly beneficial to the customer, special financing lenders are there to help you get approved when you're having trouble qualifying for traditional financing. Special finance auto lenders are more lenient when it comes to credit score and income requirements, which can be the only way some customers can get approved. Additionally, special finance lenders often report on-time payments to the credit bureaus to help you rebuild your credit score.

How to Qualify For Special Financing

The first step in qualifying for special financing is to check your credit score. The high range for special financing tends to be about 620. On the flip side, deep subprime lenders can sometimes offer special financing to customers with scores in the 300s, although they should be prepared for sky-high interest rates. Customers with no credit or gaps in their credit also make good special financing candidates.

It's also a good idea to get an idea of your debt-to-income ratio. To find your DTI, simply divide your monthly debt payments by your gross monthly income. Special finance lenders are more lenient when it comes to DTI, but there are still limits. A DTI of around 50% to 55% is about as high as most special financing lenders are willing to go.

Another important step in qualifying for special financing is budgeting for a down payment. Most special finance lenders require 10% or more down, or $1,000 if the vehicle's sales price is under $10,000. They do this to minimize the risk of defaulting and to see that you are committed to paying on time. Some lenders offer zero-down loans or will defer some or all of the down payment, but keep in mind they will almost always do so at the cost of higher monthly payments or hidden fees.

Special Financing vs. Traditional Financing

When you think of getting a car loan, the first image that may come to your head is going to the bank with your documents, having the lender determine your eligibility, and then getting a check to hand to a dealership. This is called a direct loan, and it’s one of the most common ways for consumers to finance a vehicle.

However, direct loans and preapprovals can be hard to qualify for if your credit score is less than stellar.

Direct auto loans from banks, credit unions, and the captive lenders of automakers tend to require borrowers to have credit scores above 660. While this isn’t a universal guideline, bad credit is typically considered a credit score below this, regardless of what caused the lower score. Some traditional lenders may not look too deep into your credit history – if you don’t make the cut, that’s it – you may not get approved even if you have the income to repay the loan.

With special financing done by subprime lenders or in-house financing, though, you have a better chance of getting the auto loan you need. Some of these lenders completely skip the credit check, while other special financing lenders don’t deny you financing simply because your credit score is poor.

Finding Special Financing Lenders

Special Financing: Subprime Lenders

You can finance both new and used cars with a subprime lender. Most of them require that their borrowers finance a vehicle that’s less than 10 years old, with less than 100,000 miles.

Noteworthy aspects about subprime lenders:

• They assist borrowers in unique credit circumstances
• Many subprime lenders have first-time car buyer programs
• Your auto loan eligibility is determined first before you choose a vehicle
• You’re generally required to have a down payment of at least $1,000 or 10% of the vehicle's selling price
• Subprime car loans are typically reported to the major credit reporting agencies
• They don’t issue private-party loans

The subprime financing process:

To apply for a subprime car loan, locate a dealership that’s signed up with them. The special finance manager sends your documents and information to their lending partner(s) to see if you qualify for an auto loan. If you’re approved, the lender sends a payment call, which tells the dealer the highest monthly payment you qualify for. From there, you choose a vehicle that fits within that payment call.

Special Financing: In-House Financing

In-house financing is done through buy here pay here (BHPH) dealerships. In some areas, they’re called tote the note used car lots. These dealerships only sell used vehicles, and the dealer is your lender.

Since the dealer plays a double role in car selling and financing, they often skip the credit check. If the dealer doesn’t pull your credit reports, then a poor credit history wouldn’t have a say in your auto loan eligibility. For borrowers with serious credit issues, such as a bankruptcy dismissal, multiple missed/late payments, collection accounts, or a repossession that's less than a year old, in-house financing could be the answer to your no-car problem.

Noteworthy aspects about in-house financing:

• Used cars only
• Down payment required, possibly up to 20% of the vehicle’s selling price
• A credit check may not be required
• BHPH loans aren’t typically reported to the credit bureaus
• Dealers don’t issue private-party loans
• Interest rates are generally higher at these locations

Which Special Financing Option Is for You?

Choosing the right special financing option for your situation is up to you! However, we can offer some pointers.

If credit repair is a priority for you, then a subprime lender may be a better choice. These lenders almost always report their auto loans and your timely payments to the credit bureaus. If a loan isn’t reported, your payments don’t do anything to improve your credit score. That being said, if you choose an auto lender that doesn’t check your credit reports, then it isn’t likely they’re going to report the loan, either.

Another thing to consider is your current credit situation. While subprime lenders can work with many different credit circumstances, they can’t help every borrower in every situation. For example, subprime lenders don’t approve loans for borrowers with a repossession on their credit reports that’s less than a year old. That being said, if you want to try for a car loan with a subprime lender, then it may be worth it to apply to see if they can help before you head to a BHPH dealership. Typically, BHPH dealers are considered a last-resort lending option for bad credit borrowers.

We’ve Got Bad Credit Connections!

At Auto Credit Express, we know a thing or two about special financing. We’ve created a coast-to-coast network of special finance dealerships, and we want to connect you to one in your local area.

Instead of driving all over town hoping to run into a dealer that can assist with credit challenges, complete our free auto loan request form and we’ll do the looking for you. There’s never a fee or obligation to get matched to a dealership, so get started now!