Depending on what lender you apply with, yes, bad credit can stop you from getting a car loan. However, if you apply with lenders that specialize in assisting borrowers with challenged credit, your credit score is only one part of the larger equation.
Why Bad Credit Can Be a Roadblock
Your credit reports and scores are often a cornerstone of getting approved for new credit, such as an auto loan. Your credit score serves as a snapshot summary of your credit reports, so a higher credit score usually means you have good creditworthiness.
Creditworthiness translates to roughly how much a lender is willing to trust that you can pay back the car loan. Credit scores are typically a large part of your creditworthiness, and the other major players tend to include your income and down payment size.
In some cases, even if you have enough income to prove you can afford the auto loan, a poor credit score could be enough to be handed a denial. However, there are subprime car lenders that assist bad credit borrowers, and they use many other things to determine your creditworthiness.
How Subprime Lenders Determine Creditworthiness
Subprime lenders are third-party lenders that are signed up with special finance dealerships. To determine your eligibility for auto financing, they look at the many moving factors of your financial stability.
To a subprime lender, the biggest factor in your creditworthiness is your overall stability. This means having a stable income, employment, living situation, and being able to provide a down payment. Down payments increase your chances of finishing the car loan, and they show the lender that you’re able to save up for large purchases – which bodes well for your creditworthiness.
Subprime auto loans can actually boost your creditworthiness too, because they’re reported to the credit bureaus. If you manage the loan well, your on-time payments improve your credit score, which, coupled with a completed car loan, gives you more credit opportunities in the future.
Requirements of Bad Credit Auto Loans
We’ve gathered a list of common subprime auto lender requirements to prepare for when you’re ready to apply for financing. Keep in mind that every lender varies in their specific requirements, but this is a good place to start!
Common subprime financing requirements include:
- Income and work history – Since you need income to repay the car loan, subprime lenders typically require around $1,500 to $2,500 of minimum monthly income (pre-tax). They also generally require a consistent work history. Most of the time, you need at least one year at your current employer and around three years of work history without gaps between jobs longer than 30 days.
- Living and residency stability – Many subprime lenders require that you’ve lived at the same address for around one year. The longer you’ve lived at the same residence, the better your odds typically are at qualifying for an auto loan.
- Debt to income (DTI) and payment to income (PTI) ratios – Your DTI ratio has to do with how much income you have leftover after paying your bills and the anticipated car loan and insurance payments. Your PTI ratio is your income compared to the monthly payment and auto insurance. Lenders use these ratios to make sure you’re not going to stretch your finances too thin with the car loan by making sure that you’re not currently overextended.
- Your credit score – Your credit score is the biggest factor in determining your interest rate if you qualify for financing.
- Down payment – Subprime lenders generally require a down payment of at least $1,000 or 10% of the vehicle’s selling price. Supplying a down payment is a requirement for nearly every bad credit auto loan.
- Personal references – If you qualify for financing, expect the subprime lender to ask for a list of around five to eight references with complete contact information. The only stipulation with this requirement is that your references can’t live with you.
- Working phone – Your lender may need to contact you, so they require proof that you have a working landline or contract cell phone. Proven with a recent phone bill in your name; prepaid phones don’t meet this requirement.
- Valid driver’s license – Used to verify your identity, and allow you to drive the car off the lot. The license can’t be revoked, suspended, or expired, and it must list your current address.
Knowing what a subprime lender is likely to expect of you can be one of the trickiest parts of financing, and requirements are still likely to vary depending on where you apply. The stipulations that we list are often the benchmarks for subprime auto loans. So, you can walk into a special finance dealer with some information behind you to avoid being blindsided by the requirements.
Locating a Special Finance Car Dealership
Now you know that bad credit doesn’t have to be the reason you can’t get a car loan because there are lenders willing to help, but where are these subprime lenders? Well, we can help with that too.
Here at Auto Credit Express, we’ve cultivated a network of dealerships that assist bad credit borrowers and we want to look for one in your local area. To get in touch with a dealer that has bad credit lending options, fill out our auto loan request form. It’s secure, carries no obligation, and it’s completely free – so get started now!