You may have heard people refer to some car loans as high risk auto loans. High risk car loans can have a bad reputation, but there's nothing bad about an auto loan that can build your credit score while getting you the vehicle you need – as long as you play it smart.
High Risk Car Loans
High risk car loans, sometimes called bad credit auto loans or second chance car loans, are loans for consumers who have bad, little, or no credit. These borrowers may have other negative marks on their credit reports that could cause auto loan turndowns from traditional lenders.
This is where bad credit car lenders, called subprime lenders, come in. These lenders don't offer bad credit auto loan relying solely on credit score. They look at additional factors which can help you get the loan you need.
While gathering extra documents to prove that you can meet lender requirements can seem like a burden, you can consider it the trade-off for the opportunity at a car loan.
Requirements Trade-Off on Risks
To get an auto loan through a subprime lender, there are a few requirements you have to meet which show you have the willingness, ability, and stability to take it on. Since there are some risks involved in getting a car loan with poor credit, not just for the lender but for you as well, meeting lender requirements can put both your minds at ease.
Here are four things that you need to be sure of before taking on a high risk auto loan:
1. Can you comfortably repay the loan?
Lenders don't want you to go broke just to buy a vehicle. This is one reason they have a minimum income requirement, so you're not stretched too thin when it comes to making payments. Though it can vary, most subprime lenders have a minimum monthly income requirement of around $1,500 to $2,500 before taxes from a single source. You're typically asked to prove this with your most recent computer-generated check stub showing year-to-date income.
Another repayment factor is whether or not your current bills already take up most of your income. If half of your monthly income is already being used to pay for car loans and bills, then you might run into some issues meeting the requirements. Subprime lenders use two calculations to see how much flexibility is in your budget, and so can you. You can learn more about debt to income and payment to income ratios here.
2. Do you have stability?
Having enough stability to offset the risks involved in a bad credit auto loan means having both residence and employment stability.
Residential stability means having a place where you reside on a regular, consistent basis. Many subprime lenders require that you’ve lived at your current residence for a year, or in the same area for three years. If you can't prove residence stability, a lender isn't as willing to make a car loan, since they may not be confident that you know where you might be from one week to the next.
Employment and income stability show a lender that you have had and will have, with reasonable certainty, stable employment. For most subprime lenders this means having been at the same job for around six months to a year, as well as having a continuous employment history of at least three years. Standard W-2 employment is preferred in most cases, but other forms of income, such as self-employment, may be acceptable.
3. Can you make a down payment?
Making a down payment has so many benefits when it comes to getting an auto loan. It shows the lender that you have some skin in the game, meaning you're willing to invest your own money in your chance at a car loan. Many subprime lenders require a down payment of at least $1,000 or 10% of a vehicle's selling price.
Additionally, a down payment means borrowing less. This can help you save money in interest charges down the road, reduce the time you're likely to spend with negative equity, and possibly qualify for better rates and terms than you would with a smaller down payment, or none at all.
4. How do your credit reports look?
The information in your credit reports helps lenders draw conclusions about how you've handled credit in the past. It's also important that you know what's on your credit reports and how it affects your ability to take on an auto loan.
Your credit reports contain information about your payment history, the amount of credit card debt you have, and how frequently you apply for new credit. They also contain information about bankruptcy and car repossessions which can be bringing down your credit score and show lenders that you've had trouble in the past.
On top of that, if you don't know your own credit score, you're giving up your power for negotiation. Even though a subprime lender uses other factors to determine your auto loan eligibility, knowing where your credit score stands may allow you to research things like the average interest rate someone in your situation may qualify for.
Playing it Smart in an Auto Loan
If you’ve had credit issues in the past, and you’re ready to take on a subprime car loan and repair your credit, then you’ve got to play it smart. This means taking on an auto loan that you can comfortably afford each month, having a sizable down payment prepared, and choosing loan terms that benefit you in the long run.
By having a large down payment, you can avoid putting yourself in a negative equity position, and lower your overall cost. High risk car loans tend to come with higher interest rates, but there’s less to be charged interest on if you finance less by knocking down the price of the vehicle with a down payment.
You should also consider taking on a loan term of five years or lower. Borrowers who choose long loan terms usually do so to lower their monthly payment, but for high risk loans, this could mean paying thousands extra in interest charges. Choose a loan term that you can comfortably afford, but not one that means paying way more for the car than it’s worth.
When you take steps to ensure a successful bad credit auto loan, you can rest assured that you're doing what needs to be done to get the vehicle you need. But that's not the only good thing that comes from a high risk car loan. They can kick-start your credit building, too.
Getting Better Credit Through a Car Loan
An auto loan is an excellent source of credit repair. It can build your payment history for a long period of time, since loans are typically long affairs. Taking on new credit by getting a car loan helps, too. But you can only get the credit building benefits of an auto loan if you qualify, so it's important to work with the right lenders from the start.
Here at Auto Credit Express, we can help you find those lenders without the hassle of searching around town in person. You can get the process of your next car loan started with convenience by filling out our fast, free, and no-obligation auto loan request form.
Once you take the first step, we'll search for a special finance dealership in your area that has the subprime lenders you need to get your credit back on track with the vehicle you need!