Knowing where to go to get your next auto loan is important so that you can avoid being turned down unnecessarily. There are different types of lenders for different borrowers, so choosing the one that meets your needs is vital. If you're struggling with poor credit, the loan process doesn't start out by choosing a vehicle, but the right lender.
Types of Car Loans
When you have poor credit, big-ticket items such as car loans can be more difficult to get approved for. If you're working with the right kind of lenders, though, they have processes in place to help you get an auto loan. Because it's so important to start out your car loan on the right foot, you have to know where you should start looking – auto loans aren't one size fits all, and where you get your loan from matters.
Typically, there are three main types of financing you could get for a car loan, depending on your situation and needs:
- Direct loans, which is what most people think of when they're talking about traditional loans, come from banks, credit unions, or online lenders. These loans are typically reserved for borrowers with good credit scores. If your credit score is around 660 or below, you may have better luck with a different type of auto loan.
- Subprime lenders are for borrowers who aren’t eligible for a direct loan. These lenders know that people who are struggling with credit issues are more than just a credit score, and use as much personal and financial information as they can to help them get a better picture of your situation. These lenders are sometimes referred to as bad credit lenders, and they can work with people in many different credit situations. Subprime car loans are indirect loans, though, and you can only get one by applying through a special finance dealership.
- Buy here pay here dealers are for borrowers who aren’t in a position to qualify for a subprime auto loan. These dealerships specialize in in-house financing, and aren't as prone to checking your credit as other types of lenders. This makes them a good choice for second-chance financing if you've been turned down before. However, this type of car loan may not be as helpful as you hope. The price of skipping the credit check can really take a toll, and, in some cases, you may end up paying much more than you bargained for on a used vehicle here.
As you can see, there are lots of lenders out there for you to choose from. Your personal situation, and what your credit reports say about you, are going to dictate which step you take next.
Your Credit Score Matters
To find out what type of auto loan is best for your credit situation, you need to know your credit score and what's on your credit reports. You can stay on top of your credit score by signing up for a credit monitoring service, or find it through your credit cards, bank, or credit union, many of which provide this free of charge.
In order to see what's impacting your credit score, you also need to get a copy of your credit reports. Now through April 2021, you're entitled to get a free copy of your credit reports from each of the three national credit bureaus once every week. You can request them by visiting www.annualcreditreport.com.
Knowing what's on your credit reports lets you know what the lenders are seeing, giving you a bargaining chip if they try to determine your credit for you. If you know your credit score, you also have the power to research possible interest rates so you know what kind of a deal you may be eligible for. Your credit score is the biggest factor in determining your interest rate.
If you find that you have a low credit score, don't assume that you're out of the running for a good deal. There are a lot of options for getting a car loan if you work with the right lenders for the job.
The Bad Credit Auto Loan Process
Applying with a subprime lender is often the best bet for credit-challenged consumers, but the process may seem a little different than you imagine it. Instead of choosing a particular vehicle and then finding financing for it, you need to find a dealer with the right lending resources first.
Before heading to the dealership, it's important to gather all the documentation you need to prove to the lender that you meet their requirements for getting an auto loan. Though specifics can vary by lender, all subprime lenders have similar qualifications you need to meet.
These include proving that you meet the income and employment requirements, have residential stability, and are willing to invest in your own car loan success.
Generally, proving you meet these requirements means providing the following items to the dealer:
- Check stubs – Lenders need to know that you make enough money to pay for an auto loan, so they require proof of income with a computer-generated check stub showing year-to-date income. Typically, subprime lenders require you to make around $1,500 to $2,500 a month before taxes.
- Utility bills or bank statements – These are used to prove your residence. They must be in your name, and match the address you're currently living at that you listed on the application.
- Phone bill – Lenders need to be confident that they can contact you whenever they need, so they require proof of a working landline or contract cell phone in your name.
- Personal references – Most lenders still ask you to provide a list of around five to eight personal references with complete contact information.
- A down payment – This shows that you're willing to have some skin in the game. The amount you're likely to need may vary, but many subprime lenders require a minimum of $1,000 or 10% of the vehicle's selling price.
- Driver's license or state ID – Some lenders only require a state ID, but you need a valid driver's license to operate the car. Any form or identification you use must be valid, meaning it's not suspended, expired, or revoked.
Once you provide these documents at your dealership, they act as the go-between with you and the lender. The dealer reviews your documents and application, and then presents them to the lender for an approval. If your financing request is approved, the lender lets the dealership know what the maximum monthly payment you qualify for is.
The dealer then gathers a list of vehicles they have in stock that fit into the payment guidelines provided by the lender. You're able to test drive and choose a car from these, complete your paperwork, make the necessary up-front payments (down payment, tax, title, license, and documentation fees), and take delivery of your vehicle.
Ready to Get Started?
Now that you know you have options for where to go for an auto loan, you need to decide which type of lender is best for you. If you're struggling with credit issues, a subprime lender may give you the best opportunity for a car loan. But, knowing where to find those lenders can be challenging.
Subprime lenders are indirect lenders that only operate through special finance dealerships. It can be hard to tell these dealers from others, but we know where to go to get started! Here at Auto Credit Express, we work with a nationwide network of special finance dealerships that are teamed up with the lenders you're looking for.
To get matched to a dealer in your area, fill out our fast auto loan request form. Let us help you avoid the hassle of searching for a loan, get started right now!