We have all heard the commercials where excited salespeople tell us that if we just come down to their lot—we’re approved! But once we are there, there is a lot of fine print to consider. Let us break down this common slogan to give you a better understanding of just what it means.
What exactly does it mean to have bad credit? First, let’s look at the numbers. Most dealers and lenders will use your FICO score when evaluating your credit. This is a number from 300 to 850. Typically, any score 750 or better is considered excellent and scores from 700 to 749 are considered good. Fair—650 to 699—and poor—600 to 649—usually come before a “bad” score of 600 and below.
When it comes to auto loans, anyone with a score of around 650 and lower will probably need to consider subprime financing. Your credit is much more than just a number and knowing where you stand is good. Your score comes from weighing many factors on your credit reports.
These factors go into your FICO score:
- Payment History –35%
- Amounts Owed—30%
- Length of Credit History—15%
- Credit Mix—10%
- New Credit—10%
Now, let’s look beyond the score. Your credit reports comprise your total credit history. A dealer or lender will use them to determine your creditworthiness. Credit reports include personal information, public record information, and a credit history summary. Your credit history summary includes information about the number and type of accounts you have, if they are in good standing or not, and a list of credit inquiries.
Maybe you don’t have bad credit, maybe you have no credit. If you are just starting or your file doesn’t contain enough information to generate a score, you are considered a credit "ghost." This usually makes it very difficult for a lender to determine your creditworthiness.
However, there are exceptions to this situation. For example, recent college graduates just entering the workforce may not have a strong credit history, but they may have the income to support a loan. Under certain circumstances, many lenders will take these cases into account.
It truly may not be a problem to get financed for a vehicle if you have bad credit or no credit. But, you will need to go to the right place, and meet certain requirements to do so. If you fall into either category, bad or no credit, there's a good chance you will need a subprime lender.
Subprime auto financing is done at dealerships that partner with third-party lenders that finance vehicles for consumers with credit challenges. These lenders will judge your application based on three main factors: ability, stability, and, willingness to pay. Though the specifics may vary—like whether or not they work with consumers post-bankruptcy—there will be certain requirements at all subprime dealerships.
These requirements are:
- Proof of income
- Proof of residence
- Working phone
- List of references
The Fine Print
Before you jump into a deal, you will need to make sure it is something you are truly ready for. Subprime lenders may be able to get you into a car “no problem,” but take into consideration that your choice of vehicles may be limited due to your credit situation. Also know that you will have a higher interest rate, and will most likely be required to make a down payment—usually 10 percent of the car’s selling price, or $1000, whichever is less.
If you are struggling to get approved with a subprime dealership, one additional option may be a buy here pay here (BHPH) dealer. These dealers are known as “in-house financiers.” A BHPH dealer may not pull your credit, making this a seemingly better option. But, you will most likely be required to make your payments at the dealership, often every two weeks. Be cautious, some of these places don’t report your loan or positive payment activity, which means your payments aren’t helping you improve your credit. If your credit is not improving, you will be forced to look at special financing for your next purchase, as well.
The Bottom Line
If you are properly prepared, an auto loan can help you improve your credit. By making your payments in full and on time, you can begin to see improvements in your credit score. At Auto Credit Express, our mission is to help consumers improve their credit through auto financing. We do this by matching you to a local dealer who has the resources to help those buyers with credit challenges.
So, if you are ready to take the first step toward improving your credit, let Auto Credit Express help. Get started today by filling out our cost- and obligation-free online auto loan request form.