It’s possible to get a real car loan with bad credit! If you think that statement is too good to be true, it might depend on your definition of a “real loan.”
The Consumer Definition of “Real” Loans
So, now we get into the definition of a “real” loan. How do you define a real car loan? Often, when people think of a “real” loan they’re thinking of a personal loan where a lender approves them for a lump sum that can be used for any purpose. Personal loans can be very hard to qualify for and are typically unsecured – meaning there’s no collateral – and may have extremely high interest rates.
In terms of auto financing, the equivalent of this type of “real loan” would be a car loan from a direct lender. When you get a loan from a direct lender – such as a bank or credit union – you’re given a check to take to the dealership that can be used expressly for a vehicle. One key difference is that the loan is secured by the car you’re buying. This means you’re likely to see lower interest rates than a personal loan, because the lender has your car as collateral. It also means the lender is listed on the title as the lienholder until you pay off the loan.
The trouble with direct lending is that it’s not easy to qualify for in every situation. Like personal loans, direct auto loans are based on credit. The better your credit is, the better your chances of qualifying for direct lending. So, where does that leave borrowers with bad credit or no credit? The answer is indirect lending – which is just as “real” as any other loan.
Indirect Lending – As Real as any Direct Loan
With indirect lending, you work through a dealership, and the difference is that you don’t see the money. No one hands you a check. No lump sum of money gets added to your bank account. What you do get is the keys to your car.
In this situation, the dealer works with you on behalf of the lender. They collect your application, and then all the necessary documents and paperwork, which are then submitted to a lender (or lenders) for approval. If your credit is in good shape, you generally have a wide range of options, and are eligible for lower interest rates. You’re also more likely to be approved by captive lenders such as BMW Financial Services, Toyota Financial Services, GM Financial, Ford Credit, or Hyundai Motor Financing.
With poor credit, however, the indirect lenders you need to work with won’t be as easy to spot. These lenders, called subprime lenders, only work through special finance dealers and can enable you to finance a new or used vehicle if you have bad credit. There are only certain lenders that work with borrowers who have less than perfect credit, and they have specific requirements you have to meet in order to qualify for a car loan.
Working with Subprime Lenders
Lenders who offer auto loans, including subprime lenders, usually judge your ability to qualify for a car loan on your auto-enhanced FICO score. Borrowers who fall below a 669 on the FICO scoring model typically need a subprime lender that can look beyond a credit score to get a better picture of their overall credit situation. Some of these lenders' requirements typically include, but aren’t limited to:
- A minimum income of $1,500 to $2,000 a month before taxes, from a single job
- Proof of income with a recent computer-generated check stub showing year-to-date income
- Proof of residence with a utility bill in your name, at the address listed on the application
- Proof of a working landline or contract cell phone – prepaid phones aren’t accepted
- A valid driver’s license
- A minimum down payment of $1,000 or 10 percent of the vehicle’s selling price, whichever is less
Not all lenders follow this exact list, with some having different, or even additional, requirements. No matter what the specifics are, it’s always a good idea to head into the process prepared. Knowing where your credit stands and having all the necessary paperwork at the beginning of the car buying process really helps.
Starting Out on the Right Foot
Because the lenders that offer subprime loans aren’t direct lenders, you can’t sit down with them face to face or get a check from them – but they still offer real car loan solutions for people who struggle with bad credit. Because they work indirectly through special finance dealerships, they may not be as visible, and you’ll need to know where to find the right dealer.
Here at Auto Credit Express, we know where you can go! We work with a nationwide network of special finance dealers that have the lending resources to help when you’re wading through bad credit. The process is free of cost and obligation, and you can get started right now. Simply fill out our easy online auto loan request form, and we’ll get to work matching you with a dealer today!