Preparing for a bad credit car loan starts with choosing a lender, understanding their requirements, then gathering your documents to prove you’re able to repay the loan successfully. Here’s what bad credit borrowers should know before they jump into the fray.
Choosing a Bad Credit Auto Lender
For borrowers with less than perfect credit, choosing the right lender for the job is the first, and possibly, the most important step of getting a car loan approval. Traditional auto lenders from banks, the captive lenders of automakers, and credit unions tend to prefer borrowers with a credit score higher than 660. Any lower than that, and you may face a denial – and a waste of time and energy.
To increase your chances of qualifying for an auto loan, apply with lenders that are equipped to handle tough credit situations. This includes:
- Subprime lenders – Third-party lenders signed up with special finance dealerships. They often assist borrowers with poor credit, new borrowers, bankruptcy borrowers, and those with a past repo on their credit report. If your credit report has seen better days, and you have the chops to repay a car loan, then a subprime lender could help you turn your credit back around. Subprime car loans are reported to the major credit bureaus, giving you the chance for credit repair with on-time payments.
- In-house financing – Done at buy here pay here (BHPH) dealerships, or tote the note used car lots, these dealers are the lenders. They don’t need to rely on a third-party approval for vehicle financing, so many of these dealerships skip the credit check. Without a credit check, your credit history has no bearing on your chance of at an auto loan. Generally, you simply have to prove your income, identity, and address, and be prepared with a down payment to have a shot at an auto loan. Take note though: dealers that don’t check your credit aren’t likely to report your timely payments, so credit repair may not be an option with this loan.
If you’re on the fence about which type of bad credit auto lender to try, your current credit situation can be the deciding factor.
Which Auto Lender Should I Choose?
Bad credit borrowers usually have an underlying reason why their credit score is low. The event(s) that caused a drop in points can influence your approval odds, too.
New borrower – If you’re a new borrower or a borrower with a short credit history, then a subprime lender may be a good choice. Since the loans are reported, the car loan could help you build a credit history. Having a lacking credit history can cause a poor credit score, but subprime lenders can tell the difference between bad credit caused by mismanagement and bad credit caused by being new to credit.
Habitual bad credit – If you have a long history of missed or late payments (it happens!), many subprime lenders can look past this, depending on the severity of the credit issues. However, if your poor credit is just a result of financial mismanagement, then a BHPH dealer may be what you need until those negative marks lose some of their impact, or fall off your credit reports.
Situational bad credit – If you went through a divorce, had medical emergencies, or another life event that put your finances through the wringer, you may have situational bad credit. Many subprime lenders can assist with these circumstances. Bad credit lenders know that sometimes all you need is a chance, and an auto loan can be a great way to begin rebuilding your credit after a situation beyond your control.
Past repossession – If you have a vehicle repossession that’s less than 12 months old, then a BHPH dealership is likely the route you need to take. Most subprime lenders can’t approve borrowers with a repo that’s less than a year old. However, if your repossession is over 12 months, then you may qualify for subprime financing.
Bankruptcy – Subprime lenders often work with bankruptcy borrowers, during and after the process. If your bankruptcy was discharged successfully, then you’re in the running for a subprime car loan if you can meet the other requirements. However, if your bankruptcy was dismissed with prejudice (meaning something went wrong that wasn’t a clerical error), then a BHPH dealership offers higher approval chances.
If your credit score is poor for any other reason, such as past employment issues, then it still may be still worth your time to explore subprime financing. These lenders are equipped to handle many unique credit circumstances. Your credit score isn’t the most important factor in your auto loan eligibility to a subprime lender.
What Documents Do I Need to Apply?
Most auto lenders require similar items to prove you’re able to take on a car loan. When it comes to subprime lenders and BHPH dealers, though, they may need a few more documents to get a better idea of you as a borrower since your credit score isn’t doing all the talking.
Here are some typical items you can prepare for your auto loan application as a bad credit borrower:
- Computer-generated check stubs – Auto lenders typically prefer W-2 income that’s proven with check stubs. Expect to need 30 days of check stubs proving your gross income. If you have 1099 income, a subprime lender may be willing to accept that income type if you have two to three years of tax returns proving your income.
- Down payment – Where there’s less than perfect credit, there’s a down payment requirement. Subprime lenders typically require at least $1,000 or 10% of the vehicle’s selling price. BHPH dealers may require up to 20% of the vehicle’s selling price.
- Utility bill – A recent utility bill is required to prove your permanent address. Must be in your name.
- Phone bill – Used to prove your working landline or contract cell phone. Must be in your name.
- Driver’s license – In order to test drive a car at the dealership and register the vehicle in your name, you need a valid driver’s license. Also used to verify your identity. Must be valid, meaning not revoked, suspended, or expired.
- Personal references – Subprime lenders typically require a list of five to eight personal references. Have your references’ names, addresses, and contact information. A personal reference can’t share your home address.
Of course, all lenders vary in their specific requirements. However, the documents and stipulations we listed are common and likely to be the minimum you can expect.
Where Are Bad Credit Auto Lenders?
BHPH dealerships are typically independently-operated, and plentiful around the country. Subprime lenders, on the other hand, can be a little trickier to locate. They’re third-party and signed up with special finance dealerships, but dealers don’t always advertise what lenders they work with. Here at Auto Credit Express, we want to help you locate the lending resources you need for a bad credit auto loan.
We’ve cultivated a coast-to-coast network of special finance dealers. Once you complete our free auto loan request form, we’ll look for a dealership in your local area that’s able to assist with unique credit situations. Our network includes BHPH dealers and dealerships signed up with subprime lenders, so get started on the road to your next car loan with us today!