What is a Bad Credit Car Loan?
A bad credit car loan differs from a traditional auto loan, with unique requirements and challenges in finding a subprime lender. These loans are designed for buyers with poor or no credit, helping them rebuild credit and get back on the road.
To apply for a bad credit auto loan, follow these steps:
- Check Your Credit: Obtain your credit reports and FICO score from Equifax, Experian, and TransUnion. Ensure accuracy and dispute any errors.
- Budget: Assess your budget, considering not just the car price but also repairs, insurance, and fuel costs.
- Prepare a Down Payment: Save for a down payment, which most subprime lenders require. This can lower your loan amount and monthly payments.
Preparation is crucial. Many dealerships believe "your job is your credit," approving loans if you have steady income and residence. Some dealerships use third-party lenders for subprime financing, often with higher interest rates and shorter terms due to the risk involved.
Typical Bad Credit Auto Loan Requirements
Getting a car loan with bad credit involves more steps and documentation than a traditional loan. However, your credit doesn't have to be a barrier if you find the right lender and meet their qualifications.
Basic Requirements:
- Be at least 18 years old, a legal resident of the U.S. or Canada, and have a valid driver's license.
Additional Requirements:
- Proof of income with a check stub showing a minimum monthly pre-tax income of $1,500 to $2,000.
- Proof of residency with a current utility bill.
- At least six months at your current job and three years of employment history.
- Proof of a working landline or contract cell phone.
- A list of six to eight personal references.
Financial Requirements:
- Subprime lenders typically require a down payment of at least $2,000 or 20% of the vehicle's price.
- Lenders use debt-to-income and payment-to-income ratios to ensure you can afford the car payment and insurance. Your debt-to-income ratio should be less than 50%, and your payment-to-income ratio should be no more than 20%.
Bringing these items to the dealership can help start the loan process smoothly. Calculating these ratios yourself as part of your budgeting can also be beneficial.
Situational Bad Credit vs. Habitual Bad Credit
Bad credit can be categorized into two types: situational and habitual. Subprime lenders consider the reasons behind your credit profile.
Situational Bad Credit: This occurs due to circumstances beyond your control, and lenders may be more lenient. Examples include:
- Employment loss
- Divorce
- Illness or injury
Habitual Bad Credit: This results from poor long-term financial habits. Examples include:
- History of late payments
- Multiple bankruptcies
- Repossessions
Maintaining good credit practices, such as paying bills on time, is crucial. Lenders take your credit history seriously, so reflect on why your credit is bad and how an auto loan can help you improve it.
Rebuild Your Credit with a Car Loan
Did you know that an auto loan can help improve bad credit? Acknowledging your bad credit is the first step toward improvement. To fully benefit from a car loan, you need to know your credit score and what's on your credit reports.
Your credit reports show how you use credit now and in the past, and your credit score is calculated from this information. Most auto lenders use a version of the FICO credit score, which breaks down as follows:
- Payment History (35%): How you've paid your bills over the last 10 years.
- Amounts Owed (30%): How much of your available credit you're using.
- Credit Age (15%): How long you've been using credit.
- Credit Mix (10%): Your use of revolving credit (credit cards) and installment credit (auto loans).
- New Credit (10%): Recent applications for multiple lines of credit.
Knowing this helps you understand how a bad credit auto loan can improve your credit. A car loan adds an installment account to your credit mix. Each on-time payment boosts your payment history, raising your credit score. Your new loan also adds to the new credit reflected in your report.
An auto loan can last a long time, giving your credit plenty of time to improve. By maintaining a positive payment history and paying all your bills on time, your credit can significantly improve by the end of your car loan term.
Can I Get an Auto Loan with a Repo?
Having a car repossessed is tough, but you may still qualify for bad credit auto financing. Start by checking your credit score and reviewing any damage. It's important to know what lenders will see when they consider your application. Pay your bills on time and settle any balances, especially if you still owe money on a previous auto loan. Save as much as you can for a down payment.
When shopping for a loan, compare rates from different lenders and keep your options open. A high down payment or a cosigner can improve your chances of approval since it reduces the lender's risk.
Be realistic about the car you want. Try to get pre-approved for a bad credit auto loan to set a budget before visiting dealerships. Alternatively, you can work with an in-house bad credit auto loan lender.
Questions to Ask Dealers About Your Bad Credit Auto Loan
What is a Bad Credit Car Loan?
A bad credit car loan is different from a traditional auto loan, with specific requirements and difficulties in locating a subprime lender. These loans cater to buyers with poor or no credit, assisting them in rebuilding their credit and getting back on the road.
What is the minimum down payment?
Needing bad credit auto financing doesn't always require a high down payment. The minimum down payment can vary based on the dealer and the type of bad credit auto loan you need.
How high is the interest rate?
Before finalizing your loan, ask the dealer about the interest rate on your bad credit auto loan. Keep in mind that this rate influences both your monthly payments and the total amount you'll pay over the loan's term.
What are the terms?
Auto loan lengths can vary for buyers with bad credit financing. The specific terms depend on your dealer and any negotiations regarding your bad credit auto loan.
What kind of car will I qualify for?
It's common to hear that people with bad credit auto financing are shown a different selection of cars than other buyers. Ask in advance if there are any vehicle restrictions and what type of car you can qualify for.