Getting a car loan with bills in collections through a traditional lender could be difficult, and even a subprime lender may turn you down if you have a significant amount of currently delinquent debt. However, the type of bad credit you have plays a role.
Bills in Collections
When you stop paying on an account for long enough and the company decides they don’t want to chase after the money owed, they often charge off or sell the debt to a collection agency. The agency will then try to collect the money owed from you.
It can be hard to deal with collectors calling or the letters they send. It can feel almost like you're drowning under the bills and hounding of the collection agency. Not to mention, bills in collections can stay on your credit report for up to seven years and negatively impact your credit score. This is in addition to any late payments and charge-offs that'll also affect your credit.
However, consumers have some incentive to pay off accounts in collections, provided the debt is valid and the statute of limitations isn't up. FICO scoring models – the most widely used credit score – don't consider paid collection accounts. In other words, people who pay their bills (even those that made it into collections) will be given a better FICO score.
While bills in collections can still appear in your credit reports even after you've paid them off, there'll be a distinction. The balance owed on the account should be listed as "paid" on your reports, which is certainly better than seeing "owed" in the eyes of a lender.
Situational Bad Credit vs. Habitual Bad Credit
When you apply for a car loan, a lender will look at your credit reports and scores to get a glimpse of your financial history. While seeing bills in collections will concern a lender, they can also distinguish from two distinct types of bad credit:
- Habitual Bad Credit – A form of bad credit in which a borrower has a history of consistent late payments or lack of payments. Lenders find it hard to trust a borrower with habitual bad credit because their track record shows they're a repeat offender.
- Situational Bad Credit – This is bad credit that's a result of a life event that changed a borrower's financial situation, such as job loss, divorce, or medical bills piling up as a result of injury or illness. After the event, the borrower falls behind on bills and the late payments add up and result in bad credit.
If a borrower was responsible with their bills prior to a situational event, a lender is often able to distinguish the difference between that type of bad credit and habitual bad credit. This certainly helps your cause if you need an auto loan.
Getting an Auto Loan with Bills in Collections
A lender may turn you down for a car loan because of bills in collections, and it'll be even tougher to get financed if you have a large amount of currently delinquent credit. In some cases, a lender may make the loan only if those outstanding collections are paid off.
So, if you need a car loan with bills in collections, it certainly helps to confront old debts and get current with past due balances. It'll also work in your favor if you work with a special finance lender.
Subprime lenders understand and are able to work through credit issues because they place importance on factors outside of credit such as income and job stability. However, these lenders typically only work through special finance dealerships.
Auto Credit Express wants to help you find a local special finance dealership. We match car buyers to dealers in their area that work with subprime lenders. All you need to do to get the process started is submit our free and secure auto loan request form.