Great question! The answer is no, not all auto lenders are the same. There are a few different types of lenders that you should be aware of if you need a car loan. Your credit typically determines which type of lender is the best for you to apply with.
Types of Auto Lenders
When you need an auto loan, you can either try for a pre-approval with a direct lender, or you can go through an indirect lender. These lenders have different requirements in order to qualify for a loan. Let's take a look at them:
Direct lenders are any lenders you can apply with directly, such as banks and credit unions. You can apply by either sitting down with a loan officer face to face, or filling out a loan application on the lender’s website. The type of loan you qualify for and the deals available to you mainly depend on your credit score. Often, direct lenders only offer loans to people with good credit.
If you don't have good credit but still want to get pre-approved, you may have better luck if you're a member in good standing at a credit union. Credit unions can sometimes be more lenient. Plus, they're often easier to work with as they typically don't charge as many fees as banks, due to the fact that they're a nonprofit. Though credit unions may offer low interest rates to people with good credit, they may not be as low as banks are able to go.
Indirect lenders differ from direct lenders since you can't sit down with them face to face. Instead, you work through a dealership who acts on the lender's behalf. In these types of lending situations, your application could be sent to a bank, finance company, or captive lender that belongs to one particular automaker.
The Right Auto Lender for Your Credit Situation
Most car lending is based on credit. Lenders commonly look at both your FICO credit score and your credit reports to determine if you're eligible for an auto loan. Not all lenders work with the same range of credit scores.
One group of lenders, called subprime lenders, specifically work with people who are struggling credit. Subprime lenders can be either independent financial companies or captive lenders, but all subprime lenders are indirect, and you can only work with them through special finance dealers.
When you're dealing with bad credit, subprime lenders know that you still need a way to get financed. It can be a longer process with more requirements, but in the end, getting a vehicle through a subprime lender can be your ticket to credit improvement.
Because these lenders know your credit score alone isn't enough to qualify you for most car loans, they look beyond your credit score to other factors, such as your income and employment.
Subprime Lending Requirements
There are requirements you have to meet in order to get an auto loan with bad credit. These factors help the lender assess your ability, stability, and willingness to successfully complete a car loan.
In order to verify that certain qualifications are met, lenders need to see documentation, including:
- A valid driver's license – For identity verification.
- A recent paycheck stub – For proof of income; it must be computer-generated and typically must show a year-to-date income of at least $1,500 to $2,000 per month before taxes.
- A current utility bill – For proof of residency; it must be in your name and show the address listed on your auto loan application.
- A current phone bill – To prove you can be reached by the lender when necessary. Must be a landline or contract cell phone in your name at the same address.
- A list of personal references – To verify information or contact you if needed. Typically, five to eight personal references are required, complete with names, addresses, and home and work phone numbers.
You should also know that a down payment is almost always required for a bad credit car loan, but the amount needed varies by lender. Typically, a money down rule of thumb for subprime lenders is $1,000 or 10% of the vehicle's selling price, whichever is less.
If you need help meeting some of the requirements, you may be able to add a cosigner or co-borrower. Cosigners and co-borrowers help by "lending" you their good credit and/or income, which can increase your chances of approval, and may help you qualify for a better loan terms.
A Third Auto Lender Possibility
One more possibility exists for bad credit auto loans, and that's buy here pay here (BHPH) loans. These are loans designed to help people that don't even have the credit to qualify for a subprime loan.
At a buy here pay here dealership, you work with a dealer who is also a lender, so it makes for an easy, one-stop shopping experience. Plus, you generally don't have to worry about someone checking your credit score, as these types of dealers often won't look at it.
One of the main differences between BHPH dealerships and subprime lenders is that, buy and pay here dealers don't rely on as many additional factors to get you a loan. They're mainly concerned that you have enough available income to cover your car loan, and that you can make the required down payment.
Unlike subprime lenders that require your income to be from a single source of taxable income, BHPH dealerships are concerned with your total monthly income, no matter if it's from one job or many, W-2 employment, or public benefits like social security or disability.
Get Started with Your Next Car Loan Now!
Now that you know there are different types of lenders for all different kinds of credit situations, you need to find the right lender for you. If you have bad credit, Auto Credit Express can help.
We work with a nationwide network of special finance dealerships that have the lenders available to help people with bad credit, no credit, bankruptcy, and even repossession in their credit history. To get matched with a dealer in your area, simply fill out our auto loan request form, and we'll get the process started for you!