Did you know that there are different types of bad credit? It’s true. If you have bad credit and need an auto loan, the difference between approval and denial might come down to the type of bad credit you have – situational or habitual.
A Tale of Two Borrowers
Both Danny and Johnny need to finance a car. Neither one has good credit, but both of them have done their research, found a special finance dealer who works with subprime lenders, and are ready to get the process started.
The two men have a lot in common. They both have a credit score of 619 and make $3,204 a month before taxes. Danny’s income is from a single full time job, while Johnny’s is from a combination of two jobs ($2,402 per month from one and $802 a month from another). Both men are interested in a used car costing about $18,200, and each spend $1,050 on rent and other bills each month.
Danny’s credit is low now, because two years ago he was injured and couldn’t continue at his job. His good credit took a big hit in the months he was looking for work. His credit issues are considered situational.
Johnny’s credit is low because he has been in a cycle of continuous late payments. His bad credit is habitual, and not caused by a specific event.
Same Credit Scores, Different Outcomes
Let’s look at what happens when these two consumers apply for a loan. Even though they have the same credit score and the same monthly income and expenses, these two borrowers are very different. Even going to the same lender, their outcomes won't be the same. In part, this has to do with income as well as the difference in types of bad credit between the two.
Subprime lenders are able to look past credit scores for loan approval. They’ll dig into your credit, looking at all the factors that show them your chances of successfully completing a loan. They’ll also need you to meet minimum requirements for income, length of employment, and residency. Both Danny and Johnny meet the lender’s $2,000 pre-tax monthly income requirement from a single job, and have been at their current jobs for over a year.
Using a car loan estimator, you can see that both Danny and Johnny qualify for approximately $22,080. Johnny’s $2,402 income from a single job is only used to meet the lender’s minimum income requirement. Even though both men have different single income amounts, the loan amount is based on total monthly income, taking into account debt to income and payment to income ratios.
However, Johnny still might not be approved, or may be approved for a lesser amount than Danny. This is because lenders may have trouble looking past the fact that he has a history of late payments. Danny will be viewed more favorably because his credit was good in the past, and the lender can see a specific event caused his credit to drop.
The Moral of this Story…
No matter what your credit situation, it’s important to go to the right lender for your needs. Credit is a very personal thing and each borrower is evaluated for approval based on their own specific situation. When you have bad credit, it’s especially important to take the right steps because not all lenders can work with credit challenges.
If you’re in a bad credit situation, but don’t know where to turn, let Auto Credit Express be your guide. We work with a nationwide network of special finance dealers that have the lending resources to tackle your tough credit. It’s fast and easy to get the process started – simply fill out our auto loan request form now!