With bad credit you probably will not know the interest rate you will be charged for terrible credit auto loans until you have been approved.
Approved auto loans
The first question we are often asked by applicants is what kind interest rate they can expect if they get approved for poor credit car loans.
We understand how they feel here at Auto Credit Express where, for the past decade, we’ve been helping bad credit applicants find a nearby dealer specializing in bad credit auto sales. Our website also enables them to research child support income and repossession as well as what we’ll be discussing today: why we can’t tell applicants what their interest rate will be.
Bad credit car loans and interest rates
For people with good to great credit (good is a FICO score between 680 and 739 while great is 740 or more), lenders assign an interest rate based on a credit score making comparing lenders and rates easy.
Even applicants with a FICO score between 640 and 679 might receive score-based rates that can be compared.
But when credit scores fall below 640, most traditional lenders will decline an application.
For these folks, it’s time to apply for a car loan from subprime auto lenders.
Beyond FICO scores
These lenders look past low credit scores and, using unique scoring procedures, consider other factors to first see if they qualify and then determine their interest rate.
Can they afford a car payment? The first thing these lenders look at is how much an applicant earns and what income remains each month after the bills are paid. Most bad credit lenders want all debts, including a car payment, not to exceed 40% to 50% of monthly income. The lower this debt-to-income (DTI) ratio, the better an applicant will score.
Lenders also prefer the monthly car payment to be under 15% to 20% of monthly income. The lower this payment-to-income (PTI) ratio, the better an applicant will score.
Large down payments also help. Down payments reduce the loan to value (LTV) which reduces a lender’s risk. The lower the LTV ratio is, the better an applicant will score.
Bad credit lenders also look for stability. That is, how long someone has been employed at the same job or in the same field as well as how long the applicant has lived at their current address.
Most look for one year with the current employer with a higher score given for additional job time. With short job tenure, more weight is given for employment in the same industry or switching employers due to job experience.
Living for an extended time at the same address or in the same geographical area indicates financial stability. Individuals who move often are considered “skip hazards”. If a lender needs to repossess a vehicle, they want to know where it can be found. The longer you’ve been at your current residence, the better you will score. Homeowners will score higher than renters because it’s more difficult to move if you own your home.
Applicant willingness to pay
Lenders also check credit report to see how applicants have paid their past bills – especially any auto loans. If they find “slow pays”, they’ll check to see if this is “situational” or “habitual” bad credit.
Slow payments that are the result of one incident, such as a layoff or medical emergency are considered “situational” bad credit. Never paying anyone on time is deemed “habitual” bad credit. Applicants displaying situational bad credit will score higher than those with habitual bad credit, since the former have exhibited responsible credit behavior in the past.
As we see it
Ability, stability and willingness to pay are all taken into account when determining interest rate for bad credit auto loans. Since each
lender weights these factors differently, the question of interest rates usually can’t be answered beforehand.
Here at Auto Credit Express we place applicants with poor car credit with dealers that can give them their best chance at getting approved auto loans.
So if you’re ready to take that first step to advancing your auto credit, you can begin now by filling out our online auto loans application.
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