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 we examine your unique credit situation in order to help you make the kind of choice that will both save you money and help rebuild your credit score.
Because owning a car is the second most expensive thing we will do next to owning a home, and because it is something most of us do much more often, making an informed choice about vehicle financing is important. This decision is especially critical for people who have poor credit.
For those new to the process, a bad credit car loan is an auto loan that is made available to an individual with a credit score that is considered subprime. A subprime credit score is usually considered any FICO score below a 620. People with such scores are considered to be "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 higher interest rates to offset the higher risk of them defaulting on loans.
If you do not know what your credit score is, the Fair Credit Reporting Act entitles you to a 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 and/or incorrect 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 documents 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 total.
At least $1,500 gross income is required, and a $1,800 monthly income is recommended for most credit situations. Seasonal employees or temporary employees who have been at their agencies for less than six months do not qualify. The rest is fairly self explanatory: 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
Your score plays a big part in how favorably or unfavorably a dealer or lender views your credit. To gain a better understanding of what your score means, see 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 than 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 bad credit. For example, if you have low income, a spotty job history and have missed many payment deadlines, you would be viewed as a habitual and 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. This is true even if both parties had similar credit scores. Why? The person who has exhibited responsible behavior until some sort of personal crisis occurs is perceived as less of a risk, while 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 search their network to find a dealership that is willing to work with you. The dealership that you're matched with will be determined by how low your credit score is. Not every dealership is willing to accommodate someone who can only swing a low down payment, has had a previous repossession, or is 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, offer car buyers more dealers and, therefore, better chances at success. Once paired with a dealership, the customer will begin the process of selecting a vehicle that fits their needs and negotiating the terms of the contract.
If this sounds different than the typical 'shop the car first' mentality, you would be right. But because of the limited number of dealerships who are 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. A better plan is to get your credit in order, figure out exactly how much you can afford to spend on the car that you need and then get the dream car once your credit and finances have improved.
So how does a bad credit auto loan get you closer to your dream car? Well, if you deal with a company like Auto Credit Express that only works with dealers 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 will be that much closer.
However, it's important to be mindful that many lenders, especially small lenders, do not always report your timely payments. They may be more than happy to report when you miss a payment, but they should be documenting your responsible behavior too.
But what do you do if you're trying to stay within your spending means, but cannot get your family of six into a budget five seat sedan? Obviously, money is tight, but you need just a bit more than 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 anything 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 consider. Still, it's one that works, especially for people who suffer from bad credit due to situational circumstances.
Cosigners - This can be difficult, given that you must have access to 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 on 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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