Subprime auto loans are a little different from traditional financing. And since they’re different, you may have questions about the process, whether it’s right for you, and how to get one. We’re here to offer some guidance.

Who Subprime Car Loans Are For?

Subprime vehicle financing is designed for borrowers with less-than-perfect credit. If your credit situation is similar to any of these situations, then a subprime auto loan could be for you:

  • You’ve gone through bankruptcy
  • You’re a new borrower or a first-time car buyer
  • Your credit score is below 660
  • You have situational bad credit
  • You have a repossession over 12 months old on your credit reports
  • Your credit history has negative marks

Subprime lenders can assist borrowers in many unique credit situations. If you’ve struggled to get an auto loan approval with traditional lenders, then subprime lending could be the next step.

1. Requirements of Subprime Auto Loans

Since every lender varies in their specific requirements, we can't provide an all-encompassing list of requirements – but we can provide some of the more common ones you're likely to encounter. At Auto Credit Express, we've created a network of dealerships that are signed up with subprime lenders. Thanks to our dealer network, we know the commonly requested documents you need to prepare for a trip to the dealership.

Common requirements of subprime auto loans typically include:

  • Income – To qualify for any car loan, you need income. Subprime lenders usually require you to have around $1,500 to $2,500 of minimum monthly income (before taxes). This requirement typically needs to be met by a single source, but some subprime lenders may allow multiple sources of income to meet this requirement in certain circumstances.
  • Residency – Subprime lenders require proof of permanent residence. This can be proven with a recent utility bill in your name or a recent bank statement.
  • Down payment – Having bad credit almost always means needing a down payment to qualify, and subprime lenders typically require at least $1,000 or 10% of the vehicle's selling price.
  • Working phone – Subprime lenders may need to contact you, so they require a working contract cell phone or landline phone. Proven with a recent phone bill in your name.
  • Valid driver's license – To drive the car off the lot, you need a valid driver's license. This also proves your identity. Your license can't be revoked, expired, or suspended.
  • Personal references – This isn't a requirement to qualify for financing, but it's likely the lender will ask you for a list of references. Typically, they ask for five to eight references with complete contact information. The only requirement with references is that they don't share your address.

Remember that these are only general guidelines for what to expect from a subprime lender, but it's definitely a good place to start!

Your personal situation may require the need for more or different documents to qualify you for auto financing. For example, if you had a bankruptcy that was recently discharged, then you may need your discharge papers to prove you're in the clear.

Letting the special finance manager know what your situation is can make the process easier, and help move it forward without too many snags.

2. The Subprime Car Loan Process

Subprime financing involves a different order than traditional auto financing. You first need to qualify for a loan before you can choose a vehicle. If you’re approved, the subprime lender sends the special finance manager the payment call, which is the maximum monthly payment that you qualify for. From there, you choose a car that fits your needs and the lender’s requirements.

How the steps break down:

  • Find a special finance dealership
  • Apply for a car loan with subprime lender(s)
  • Lender determines eligibility
  • If approved, a payment call is sent
  • Choose a vehicle and take delivery

3. Interest on Subprime Car Loans

One of the most common questions we get here at Auto Credit Express is what interest rate a user can expect with a subprime auto loan. We’re not a lender, but we can tell you that borrowers in our dealership network have an average interest rate of around 13%.

Where there’s bad credit, there’s almost always a higher interest rate. Your credit score is key in determining what rates you can qualify for, and every lender may have a different definition of what bad credit is. For the most part, borrowers with credit scores below 660 are likely to be considered bad credit borrowers or subprime borrowers. If you have a credit score in that range or lower, then you may have to plan for a high interest rate. However, refinancing is a common route bad credit borrowers explore to lower their interest rate on their vehicle later on.

If you’re looking for a lower rate despite a poor credit score, consider getting a cosigner. Cosigners can improve your eligibility chances for a car loan and may help you land a lower interest rate than if you were to apply alone.

4. Down Payment Requirements

Odds are, you’re going to need a down payment. Most subprime lenders require at least $1,000 or 10% of the vehicle’s selling price down. Trade-in equity, cash, or a combination of both can be used to meet this requirement.

Down payments save you money as a borrower, too. Since auto loans are almost always simple interest, the less you borrow, the less you pay in interest charges.

5. Income Requirements for Subprime Auto Loans

Subprime lenders typically have a minimum monthly income requirement of $1,500 to $2,000 before taxes are taken out. This will vary from lender to lender, and will even be different across the loan programs a lender offers. In most cases, with all else being equal, the more you make, the better your chances of getting approved. This requirement must be met with a single source of income. You'll need to show proof of income with the appropriate documents.

In general, subprime lenders prefer borrowers with W-2 income proven with recent computer-generated check stubs. Another common situation is if your income isn't W-2 and you don't receive check stubs. If you're a 1099 worker, then you're likely to need two to three years of tax returns to prove you have the income for an auto loan.

Keep in mind that subprime lenders are looking for your pre-tax, or gross, income. This is what you make before social security, Medicare, income tax, and employer deductions like healthcare and 401(k) contributions are taken out.

6. Debt to Income and Payment to Income Ratios

In addition to a minimum income requirement, subprime lenders use two ratios to get a better idea of your ability to pay back a car loan:

  • Debt to Income Ratio – Lenders look closely at your monthly income compared to your bills. They'll take the total of your bills and divide it by your monthly income to find your debt-to-income (DTI) ratio. This shows how much of your income is already dedicated to other expenses. Subprime lenders typically set the maximum DTI ratio they'll accept at 45% to 50%.
  • Payment to Income Ratio – At the same time, these lenders don't want your car payment to take up too large of a chunk of your monthly income. They set a maximum payment-to-income (PTI) ratio, usually between 15% and 20%, to make sure this is the case. Your PTI can be found by taking the combined total of your estimated monthly car and insurance payments and dividing it by your monthly income.

Again, subprime lenders will use your gross monthly income when making these calculations.

7. Who Are Subprime Auto Lenders?

Subprime lenders are indirect lenders, meaning they’re signed up with special finance dealerships and you don't meet with the lender in person. Instead, the special finance manager at the dealership acts as the middleman between you. This differs from a direct lender such as a bank or credit union, where you get financing right from the source and take it to the dealership with you. Direct lending is more difficult to get if you're struggling with a low credit score.

Subprime lenders are also called bad credit auto lenders. They specialize in assisting borrowers with poor credit, those who've gone through bankruptcy, and those in other challenging credit circumstances. Subprime can also refer to the credit rating as well, typically defined as a credit score around 501 to 600, or those with a credit score below 670. Borrowers with credit in this credit score range are typically referred to as bad credit borrowers and may need the help of subprime lenders to get an auto loan approval.

Getting into a subprime car loan means finding a dealership that's signed up with these lenders. Many dealerships are signed up with third-party lenders that can finance borrowers with lower credit scores. The finance manager at these dealerships acts as the middleman between you and the lender. Locations that are signed up with subprime lenders are called special finance dealerships.

Subprime lenders differ from traditional auto lenders (think banks, credit unions, online lenders, and some automaker's captive lenders) in that a poor credit score isn't enough to get turned down for financing. They know that your credit isn't going to be perfect when you're seeking a subprime car loan. So, they look at your credit history as a whole, your income, your living situation, and many other factors to determine your creditworthiness and eligibility for vehicle financing.

Finding Subprime Lenders

You can apply for a subprime car loan at a dealer that’s signed up with these lenders. Dealerships signed up with them are called special finance dealers, and there are many across the country. However, they’re always easy to spot, since many dealerships don’t advertise their lending partners. So how can you tell which ones are signed up with the lenders you need?

At Auto Credit Express, we want to make the search for your next auto loan easier by matching you to a special finance dealer in your local area. Get started right now by completing our free car loan request form. We’ll look for a dealer near you with no fee and no obligation.