Applying for a bad credit car loan can have a lot of negative stigmas attached to it. However, just knowing the fact that poor credit doesn't have to stop you from getting an auto loan is something that should be celebrated, not feared. One of the best bits about a bad credit car loan is that if you keep up with it, you may find yourself in a better credit situation when all is said and done.
Applying for the Right Kind of Auto Loan
When you're applying for a bad credit auto loan, you have to make sure you're doing it with the right kind of lender for your credit situation. If you just apply everywhere, you could become frustrated with turndowns, and ultimately do more harm to your credit than good.
If you have the right type of loan, and make all your payments on time, you have a good chance to improve your credit by building a solid payment history. However, just like car loans, lenders aren't one size fits all, and not all lenders report your timely payments to the credit bureaus to improve your credit.
Conversationally, you're likely to hear the terms "traditional" and "subprime" when it comes to auto loans. Those are just general terms people use to differentiate between good and bad credit borrowers. This is why it's important to know which type of lender can work with your credit situation.
Options for Bad Credit Borrowers
Options differ when it comes to financing a vehicle as a bad credit borrower and a good credit borrower. Typically, if you have good credit, you can get what's known as a direct loan through a lender such as a bank or credit union.
A direct loan comes from a financial institution, and if you're approved, you're given a check for your loan amount which you can use to purchase a car anywhere, just like a cash buyer. These are typically considered traditional auto loans.
Just because you have bad credit doesn't mean you can't apply for a loan with a traditional lender. Just know that approval chances are generally slim. Commonly, your lending options for a bad credit car loan come from subprime lenders – lenders that can work with borrowers who have less than perfect credit.
Not every dealership works with these subprime lenders, but more dealers may work with credit-challenged consumers than you may think. It's usually possible to find a bad credit auto loan from either an indirect lender or an in-house financing dealership.
Let's see what you're looking for when you need a subprime car loan:
- Indirect lenders – This refers to lenders that work indirectly through special finance dealerships. These are typically subprime lenders working through a special finance dealer, but they're not the only ones. Captive lenders – the lending arm of auto manufacturers – work with people that have imperfect credit, too, but only in some cases. This means that indirect lenders can be found at both independent and franchised dealerships. However, in both cases, you work with the dealer’s finance or special finance manager, and they interact with the lender on your behalf.
- In-house financing – Lenders that practice in-house financing are both lenders and dealers. These are more commonly known as buy here pay here (BHPH) dealerships or tote the note car lots. Often, these are a last resort if you find yourself turned down for financing from a bad credit lender through a dealer. This option can seem appealing because BHPH dealerships are known for not running a credit check. However, because they don't check your credit, they're less likely to report it, too. This means you may not be able to improve your credit score with a loan through a BHPH dealer. Additionally, you may get a better value with a different type of lender.
Though you have many options to try as a bad credit borrower, direct lenders typically reserve their auto loans for people with good credit. This is why it's important to know where your credit stands before you apply for a car loan. Subprime lenders and BHPH dealerships both have the ability to work with people who have credit challenges.
Know Your Credit Situation
Knowing your credit situation should be the first step in any loan process.
If you don't know what the lenders are seeing when they look at your credit score and reports, then you don't have a chance to look for a better deal. By not knowing your own credit, you're giving a lender carte blanche to tell you that you qualify for only the highest interest rates or longest loan terms, and you'd never know the difference.
Knowing where your credit stands gives you the power to research what types of interest rates and loan terms you can expect for your situation, which helps keep you from accepting a deal that may ultimately be unaffordable in the long run.
Tips to Keep in Mind Before Applying
Before you apply for a bad credit auto loan, you should be prepared for the process, and this means gathering required documents, and fulfilling any stipulations the lender may have. This usually requires having a valid driver's license, and proving to a lender that you meet the requirements they have for financing.
Preparing for a car loan is something we cover often, and you can find a full list of typical bad credit auto loan requirements here.
Once you've got all your paperwork in order, it's also important that you go into the car loan process with a budget in mind. Always give yourself a little wiggle room go up or down on price; you may be more likely to default on your loan if you stretch yourself too thin.
Lenders also look for this by calculating your debt to income (DTI) ratio. This ratio tells a lender how much income you have available for something like an auto loan and car insurance once all your monthly bills are paid. You can learn more about calculating your DTI ratio here.
Lastly, before you dive into a car loan, you should also strive to save a down payment. Making a down payment is sometimes referred to as having some skin in the game, and that's how lenders like it. Studies have shown that people who invest in their own success with a down payment are less likely to default on their loans, because they don't want to feel like they're losing the money they already put down.
Down payments are a standard requirement for most lending situations, especially if you're a bad credit borrower. Subprime lenders usually ask for a minimum of $1,000 or 10% of the vehicle's selling price down.
Ready to Apply for a Bad Credit Car Loan?
When you have a lower credit score, it can decrease the number of auto loan options you have. That's the beauty of a system like ours here at Auto Credit Express. Rather than spending time calling around to every dealership in a 50-mile radius to see if they offer special financing, we connect you to a dealer near you that works with subprime lenders that can help people with credit challenges.
If you're ready to skip the hassle and find the loan you've been seeking, start here with us. Simply fill out our easy car loan request form, and we'll get to work matching you with a dealership in your area. Get the auto loan you need and start rebuilding your credit!