When people talk about getting a car loan you may hear them refer to subprime lenders, captive lenders, or direct lenders. These types of auto lenders all cater to different borrowers. Perhaps the biggest difference between them is that some of them work with bad credit borrowers, while others don't. So, just what is considered bad credit when you need a car loan and which lender should you opt for?
Credit Scores for Car Loans
Your credit score is a three-digit number between 300 and 850. It's important when you need credit in life such as car buying, getting a home mortgage, and opening a credit card. No one is born with good credit – you have to earn it. This journey typically starts at age 18, when a person can enter into legal contracts on their own. When you do start, your credit score usually lands somewhere in the low to mid-range of the spectrum.
Each on-time payment for various accounts – utility bills, loans, medical debts, etc. – all help build your credit score. On the flipside, missed payments, defaulted loans, and general financial mismanagement can lead to hardships that can lower your credit rating. As a general rule, the better your credit score is the better off you are in life when it comes to borrowing for life's major purchases – like a vehicle.
Oftentimes, bad credit is considered a FICO credit score of around 660 or below. Though there are many different credit scoring models, the most commonly used among auto lenders is the FICO credit scoring model. Lenders have varying cut-off points as to what credit score ranges they can work with. Scoring ranges can vary, but typically credit scores are arranged into five tiers: super prime, prime, nonprime, subprime, and deep subprime.
Let's breakdown the credit score tiers and see which auto lenders might consider you based on credit score.
Good Credit Scores and Auto Loans
Good credit borrowers usually have a better chance of getting approved for new credit, such as car loans. Lenders prefer borrowers with solid payment histories and good credit management. Building a good credit score can take time, but it can save you money when you do need to take on new credit, so the hard work is worth it.
Super Prime: 751 to 850
When you hear the phrase "excellent credit" think of someone in the super prime credit tier. When it comes to car loans, the better your credit score is, the more opportunities you tend to have. Top-tier borrowers often get the lowest interest rate, best loan terms, biggest loan amounts. These borrowers can shop nearly anywhere for a car loan with ease, as long as they have the money to do so and can meet the other lender requirements.
Prime: 661 to 750
Prime credit scores are typically considered good credit. Borrowers in this group may not have as many options as the super prime borrowers, but they're likely not getting turned away from most places. Lending opportunities are a pretty open playing field when your credit score is in this range. Again, the higher the better. When you need a car loan and you have good credit, chances are you're eligible for a direct loan, meaning you can get pre-approved for a loan from a bank, credit union, or online lender, usually with little difficulty. You're also likely to qualify for a car loan approval from a captive lender through a franchised dealership, and are likely in a good position to lease.
Car Loans for Bad Credit Borrowers
The three tiers in this section are what auto lenders typically consider bad credit. The first, nonprime, occupies the grey area between good and bad credit. A credit score below nonprime can lead to credit difficulty, and you may need to do a little legwork to find vehicle financing. Let's take a look:
Nonprime: 601 to 660
The borrowers that fall in this group are usually at the lower end of the qualifying spectrum when it comes to working with direct or captive lenders, and the top of the class when it comes to working with subprime lenders. It can be an interesting position to be in. You're likely to have many auto loan opportunities, but you may not qualify for the best interest rate or loan term with all lenders. On the other hand, if you have all your ducks in a row, and you don't mind paying a little extra in interest charges, you may qualify easily for an auto loan with a subprime lender (more on this in just a moment).
Subprime: 501 to 600
Subprime borrowers are typically considered bad credit borrowers, usually with a credit score around 600 or below. While finding vehicle financing can prove challenging, there are subprime lenders that specialize in working with borrowers in this scoring range. They look at factors besides credit score to help get you approved for the lending you need, such as your income and overall financial stability.
Deep Subprime: 300 to 500
With a credit score in the lowest range, it can be more difficult even to work with most auto lenders. All hope isn't lost though, since there are many simple ways to build your credit if it's fallen to this level. If your credit score is in this range because you're new to the world of credit, lenders can tell the difference between no credit and bad credit consumers. There are still lenders that may work with you when it comes to getting an auto loan if you know where to look. You may need to turn to a buy here pay here dealership or get a rent to own car to get some wheels quickly. Once you start building your credit score, though, you can then move on to a subprime auto loan that can improve your credit even more.
Determining Your Credit Rating
Knowing where your credit stands and what's on your credit reports is a great first step to getting a car loan. You need to know your credit rating so that you can be well-informed, research under your belt, and have a leg to stand on in negotiations for an auto loan. If you don't know what the lender is seeing when they pull your credit, you're leaving yourself in the dark.
Imagine if you visited an unscrupulous dealership and the dealer realizes you don't know what's on your credit report. They could potentially tell you that a high interest rate is the best they can do. While your credit score might actually qualify you for a lower rate, you couldn't negotiate or keep the ball in your court because you don't know what your score is or what the average interest rate is for people in similar situations.
To avoid potential hazards like the imagined situation above, make sure you know your credit score and what is on your credit reports. The information in your credit reports is what helps determine your credit score. So the more positive accounts you have listed, the better.
The easiest way to get your credit reports from the three national credit bureaus – TransUnion, Experian, and Equifax – is to visit www.annualcreditreport.com. This government website normally allows you to receive a copy of your credit report from each company for free once every 12 months. However, due to the recent coronavirus pandemic, the site is allowing you to receive your reports once a month for free until April 2021.
Some credit bureaus, such as Experian, offer deals and free services when it comes to monitoring your credit reports and scores during trying economic times. Or you can sign up for any number of credit monitoring services to stay on top of your score and reports.
Finding the Right Dealer for Your Credit
When it comes to finding a car loan with poor credit, you want the path of least resistance, and we want to point you in the right direction. At Auto Credit Express, we've been matching credit-challenged consumers with dealerships that are signed up with subprime lenders for over two decades. Let us make your next car loan experience quick and easy by taking the hassle of searching for a dealer off your plate.
By simply filling out our fast, free auto loan request form, you can start the process of getting connected to a dealership that's signed up the right kind of lenders for your credit. Don't hesitate any longer, get on the road to your next car loan now!