There are times when even a good job and decent income aren't enough to save you from an auto loan denial, and often, it’s because of a bad credit score. However, there are options for borrowers with less than perfect credit.
Good Income and Poor Credit
There can be many reasons a borrower has a bad credit score, and it can be tough to overcome even with a good-paying job. Income and employment history are key components of getting approved for a car loan – you need provable income to repay the loan! But for many traditional auto lenders, it may not be enough to meet their income and employment requirements for vehicle financing alone.
Many traditional auto lenders also use credit scores as a way to judge your creditworthiness. Your creditworthiness represents your ability to repay debts, based on how well you've handled credit in the past. If your credit score is poor, it may give the impression that you’ve had trouble repaying your bills and/or loans on time in the past, which can make a traditional lender hesitant to approve you.
The logic behind this is that while you may have the money to make loan payments on a car, the lender may still be concerned due to your questionable credit history.
Generally speaking, a credit score below 660 is considered poor. Negative marks on your credit reports, such as a past vehicle repossession or bankruptcy, can be a reason you're turned down for auto financing as well.
If you’re in this boat and you need a car loan, it may be time to consider subprime financing.
Subprime Car Loans
To a subprime lender, your credit score is only one piece of the puzzle. Your credit reports and score do make an impact, but it’s not always a deal-breaker. They often help borrowers with credit issues stemming from divorce or job loss, bankruptcy, and bad credit due to a thin credit file.
In fact, most of their requirements for vehicle financing have to do with your ability, stability, and willingness to pay for an auto loan. If you can meet the income and job requirements for subprime financing, you’re well on your way to getting a subprime auto loan.
Here are the three pillars of subprime auto loans:
Ability – This is your income and budget. Subprime lenders need to see provable income that’s sufficient enough to repay the loan successfully. Usually, subprime lenders require a minimum monthly income of around $1,500 to $2,500 before taxes. You must also have enough available income to cover the car payment and full coverage auto insurance without overextending yourself.
Stability – This factor is about your financial and living stability. Typically, the longer a borrower has been living in the same area and held the same line of work, the more likely they are to repay the loan successfully. Subprime lenders typically require that you’ve lived in the same residence for around one year, and had the same job for around six months to a year. They may also ask about your work history from the last three years and require that you’ve had steady work during that time (with no gaps between jobs longer than 30 days).
Willingness to pay – This is your down payment requirement. Subprime lenders almost always require a down payment, of at least $1,000 or 10% of the vehicle’s selling price. Money down increases your odds of approval, because down payments lower the amount you're financing, and give you some skin in the game. You can use cash, trade-in equity, or a combo of both to meet this requirement.
Besides these three pillars, there are a few other things you can gather to prep yourself for subprime auto financing:
- Recent computer-generated check stubs to prove your W-2 income source
- Your last two to three years of tax returns if you have a 1099 income source
- Award letters if you earn permanent disability, Social Security, or alimony
- A list of five to eight personal references
- A valid driver’s license
- A recent phone bill for proof of a working phone
- A recent utility bill or bank statement to prove residency
- Discharge papers if you were recently in bankruptcy
Of course, not all of the above items are required for every borrower, and subprime lenders vary in their requirements for car loans.
How Do I Find Subprime Lenders?
Finding a subprime lender starts with finding a dealership that’s signed up with them. Subprime lenders specialize in assisting borrowers in tough credit circumstances. They're third-party lenders, so you actually work with the special finance manager at the dealership who acts as the middleman between you and the lender.
Getting in touch with a dealership that’s signed up with subprime lenders could prove tricky. But here at Auto Credit Express, we want to make the search for your next auto loan easier.
Over the last two decades, we’ve created a coast-to-coast network of dealers signed up with subprime lenders, and we want to look for one near you. Simply fill out our free auto loan request form, and we’ll get right to work helping you get the connections you need. There’s never a cost or obligation, so get started today!