Being denied an auto loan is disheartening, but there are lenders for those with lower credit scores that can often offer a second chance in car financing.
Finding Second Chance Financing
There are generally two options for bad credit borrowers when it comes to second chance financing: in-house financing and subprime loans. These loans are more common than you might think. Traditional lenders may turn you down with a poor credit score, but you might be able to get approved by a bad credit lender.
Many borrowers with less than perfect credit finance through a buy here pay here (BHPH) dealership. At these lots, the dealer is also the lender, and they provide in-house financing. This means the shopping and financing are done in the same place, and you may also have to make your car payments there, too.
Another option is going through a special finance dealership and working with a subprime lender. These lenders do take a look at your credit reports, but they also consider your income, residence stability, and willingness to make a down payment. At these dealers, the finance manager works on the subprime lender’s behalf.
If you’re looking for a second chance auto loan, we cover how both financing options work, and how to find them.
Buy Here Pay Here Dealerships
Finding a BHPH dealership usually isn’t hard. There are used car lots across the country in most cities that advertise in-house financing, bad credit auto loans, and second chance lending options.
In-house financing dealers don’t rely on third-party lenders for car loan approvals, since they’re also the lender. The biggest plus for bad credit borrowers is they don’t normally review your credit reports since they’re more concerned about your income and your ability to make a down payment.
The income requirements vary at BHPH dealerships, but you still need to prove you have a steady income that will last for the entire loan term. The down payment needed also varies, but you may be expected to come up with 20% or more of a vehicle’s selling price. The income and down payment requirements also depend on the type of car you’re looking at, and BHPH lots only sell used vehicles.
Additionally, you should expect a higher than average interest rate on your loan. Since there isn’t a credit check, a high interest rate is usually considered the trade-off at these dealers.
If you’re looking to improve your poor credit score with a BHPH loan, it may not happen. Not all BHPH dealerships report auto loans or payments to the major credit reporting agencies, meaning your on-time payments won’t be reflected on your credit reports. A loan that isn’t reported won’t improve your score.
However, all these dealers report missed or late payments, in addition to defaults and repossessions. If you’re looking to improve your credit score and buff up your credit reports, simply ask if the dealership reports their loans. If they don’t, you should look for another.
If you’d have a recent car repossession (less than a year ago), or other severe credit damage, a BHPH dealer may be your second chance at getting approved for auto financing.
Subprime car loans are reported to the credit bureaus. With a second chance auto loan, you’re given the opportunity to improve your credit score if you keep up with the payments. Finding a subprime lender is a little trickier than finding a BHPH dealer, since these lenders tend to work through a dealership’s special finance department.
As for financing requirements, subprime lenders tend to follow similar guidelines. Typically, you’re going to need to prove a monthly minimum income of around $1,500 to $2,000 (before taxes), and have a stable, consistent work history. Your income can be proven with a recent computer-generated paycheck stub that lists your year-to-date income.
Additional items you need to be considered for financing generally include:
- A recent utility bill or bank statement in your name that proves where you live.
- A working phone (landline or contract cell phone) proven with a phone bill in your name.
- A valid driver’s license.
Subprime lenders also require a down payment, usually of at least $1,000 or 10% of the vehicle’s selling price (occasionally whichever is less). This is determined once you’re approved for financing, since your available income determines your monthly payment budget. After approval, you can also expect to need to supply the lender with a list of five to eight personal references with complete contact information (phone number, addresses, email, etc.). From there, you choose a car on the dealer’s lot that you qualify for, sign the loan documents, and take delivery.
The goal with these second chance auto loans is setting you up for success. The lender uses your information to tailor loan terms that best fit your credit situation, and sets you up with a car payment you can reasonably afford so you can successfully complete the loan.
Finding a Second Chance Auto Loan
If your credit union or bank isn’t able to approve you for a loan, or your credit score simply isn’t up to snuff, second chance financing dealerships could be for you. The kind of second chance financing you choose is going to largely be determined by your income, work history, and ability to come up with a down payment. But, if you want to save time and energy searching for the right dealer, start here with us.
At Auto Credit Express, we want to help if you’re ready to take the leap and find a dealership that can work with you. We know which dealers work with bad credit borrowers and offer second chance financing. To get matched to a dealership near you, complete our free auto loan request form.