Just because you have bad credit doesn’t mean you don’t have options when it comes to auto financing. The key is to work with the right lender. But which lender is right for you? It all depends on your current credit and financial situations, and we can explain what your options are.
Types of Lenders You Could Work With
Although you have a number of lender options when it comes to getting a bad credit car loan, it doesn’t have to be intimidating. You may not meet every lender’s qualifications, but it’s important to understand what each one is looking for.
When it comes to bad credit auto financing, here are four different types of lenders you could work with:
- Your bank or credit union – If you have a good relationship with your bank or credit union, they may be able to offer you a pre-approval. Because you’re working directly with the lender, this is considered direct lending. Direct lenders typically place a heavier emphasis on your credit score, and are likely going to turn you down if your credit is too low.
- Subprime lenders – Subprime lenders work through special finance dealerships, and know how to handle unique credit situations. They’re a type of indirect lender, since you work with the dealer, not directly with the lender. These lenders check your credit, but consider additional factors such as income and employment stability.
- Captive lenders – Captive lenders are another type of indirect lender. Each captive lender offers loans through the dealerships of their vehicle manufacturer. Examples include Kia Motors Finance, GM Financial, and Ford Motor Credit. Captive lenders generally offer loans to consumers with good credit, but some may offer loans to near-prime and subprime buyers.
- Buy here pay here dealers – Buy here pay here (BHPH) dealerships are also lenders, and are sometimes referred to as tote the note dealers. Many BHPH dealerships don’t run your credit, and instead base approvals on income. It’s easier to get approved through a BHPH dealer, but you may not get the chance to build your credit if they don’t report loans or on-time payments to the credit bureaus.
No matter which type of lender you end up working with, your interest rate is likely going to be higher than average. This offsets the higher risk of bad credit, and it’s not uncommon for consumers to get approved at interest rates over 10%.
How to Increase Your Approval Odds
Finding the right lender to work with is important, but if you’re worried about qualifying, you should know that there are ways to increase your approval odds. It’s important that you meet the income and employment requirements, but you could increase your odds of getting approved by doing any or all of these three things:
- Improve your credit score – Your credit score is a big factor in determining if you qualify and what you qualify for when it comes to a bad credit car loan. If you’re able to wait and improve your credit score, you should. The better your score, the lower the interest rate you’re likely to get. You should continue to pay your bills on time, add lines of credit to responsibly manage, and keep your credit utilization ratio below 30% to improve your credit score.
- Add a cosigner or co-borrower – If you need an auto loan right now, you could increase your approval odds by adding a cosigner or co-borrower to the loan. Cosigners help if your credit score is low and you need an extra boost, while co-borrowers can help your income situation.
- Make a larger down payment – A down payment is typically required with a bad credit car loan. You can make the minimum and be OK, but we recommend you make the biggest down payment you can comfortably afford if you have poor credit. When you make a larger down payment, you lower the monthly payment, save on interest charges, and reduce the lender’s risk. Fortunately, you can make a down payment with cash, trade-in equity, or a combination of both.
Get Started on Your Car Buying Journey Today
Finding the right lender to work with when your credit is bad isn’t easy. It can be a struggle going from dealer to dealer only to get turned down, but that’s why we want to help make the process easier.
Here at Auto Credit Express, we've been helping car buyers with credit issues get connected to the right resources for auto loan approvals for over 20 years. We want to help by matching you with a dealership in your area that can work with unique credit situations.
Our service is free and comes with no obligations. Go ahead and fill out our simple and secure car loan request form to get started today.