Did you recently try to buy a car but were denied an auto loan due to bad credit? It’s possible you were working with the wrong lender. Not all lenders deal with bad credit consumers, but here at Auto Credit Express, we can point you in the direction of one. In addition, we have some tips to help you improve your chances of getting approved for a car loan the next go around.
3 Things to Do before You Apply for an Auto Loan
Where you may have gone wrong when you first applied for an auto loan is not doing some prep work. You should know where you stand in terms of credit and finances. This way, you aren’t going to be caught off guard and turned down again.
Before you head to a dealership, make sure you do these three things:
- Check your credit score and reports – You need to know your credit score, and what’s listed on your credit reports. Most lenders look at your FICO score. If your bank, credit union, or credit card company doesn’t offer access to it, you can go to www.myFICO.com and pay a fee to get it. For your credit reports, you’re entitled to a free copy from each credit bureau every 12 months. You can request them at www.annualcreditreport.com. Check that everything is accurate, and dispute any errors with the reporting bureau immediately.
- Calculate your debt to income ratio – Your debt to income (DTI) ratio shows how much available income you have after factoring in your expenses. Lenders want to make sure you can afford a car loan, and they do this by calculating your DTI ratio. Generally, the maximum DTI ratio they accept is around 45% to 50%. To find your DTI ratio, add up all your monthly bills, plus an estimated vehicle and an insurance payment, and divide the total by your pre-tax monthly income.
- Calculate your maximum car payment – Also referred to as your payment to income (PTI) ratio, this number determines your maximum acceptable vehicle payment. Subprime lenders usually won't accept a payment that accounts for 20% of your income. To calculate your PTI ratio, take your pre-tax monthly income and multiply it by 0.20 (20%). The result is the maximum car payment you can expect to get approved with if you have bad credit.
Types of Lenders for Bad Credit
Now that you know what to do, you should learn about the types of lenders you should be working with. It's typically difficult to qualify for a pre-approval with a bank or credit union if you have bad credit. You may not be able to qualify with other traditional lenders, like online lenders.
This leaves you with two options:
- Subprime lenders – These lenders specialize in car loans for consumers with less than perfect credit. You can't apply with one directly, but they work through special finance dealerships. Subprime lenders qualify borrowers using their credit score, but they also base approvals on additional factors like income and residence stability.
- Buy here pay here dealerships – BHPH dealers are unique in that they are also lenders. This means they're a one-stop shop where you can buy and finance a vehicle all at the same place. Buy here pay here dealerships are a good place to get an auto loan if you have bad credit because they generally don't use your credit score to qualify you. Instead, they base approvals on your income.
Keep in mind that both types of lenders usually require a down payment, and you can expect your interest rate to be higher than average. Make sure you save up if you’re looking to make the monthly payment more affordable – a larger down payment also lowers the overall cost of the loan.
Find a Dealer to Work With
It’s not easy buying a car with bad credit, but you can still get approved even after being denied an auto loan. A big key to success is working with the right lender, and Auto Credit Express can help you find one.
We work with a nationwide network of special finance dealers that have subprime lenders ready to work unique credit situations, whether it be bad credit, no credit, or bankruptcy. See who we can match you with by filling out our simple, no-obligation car loan request form today!