Preparing thoroughly for a big purchase such as a car is essential, particularly if you have less-than-ideal credit. Although many people are familiar with the concept of bad credit, not everyone understands what a bad credit auto loan is or how it functions.
If your credit is poor and you require a vehicle, a subprime auto loan provides a means of obtaining financing. Moreover, it offers an opportunity to improve your credit as long as you make your loan payments on time each month. By understanding what to anticipate and planning ahead, you can increase your chances of success with your bad credit car loan.
What is a bad credit auto loan?
Bad credit auto loans are designed for buyers with less than perfect credit or no credit history. These loans offer a way for individuals with poor credit to obtain financing for a vehicle, and also provide an opportunity to improve their credit as long as they make their loan payments on time each month. However, obtaining a bad credit car loan is different than securing a traditional auto loan, and requires additional steps and documentation. Not every dealer has a special finance department that can handle these loans.
If you are considering applying for a bad credit auto loan, it is essential to properly prepare:
- Review your credit reports and check your credit score - Knowing your credit standing is vital. Most lenders rely on your FICO credit score to determine loan eligibility. You are entitled to a free credit report once a year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Make sure the information is accurate and dispute any errors with the appropriate bureau. Checking your credit score can also help you research the typical interest rates for borrowers in similar situations.
- Create a budget - Estimating how much you can afford for a car involves more than just the vehicle's price. Consider the cost of repairs, insurance, and fuel as well. Avoid overburdening yourself financially, particularly when your credit is struggling.
- Prepare a down payment - A down payment can greatly benefit a bad credit auto loan. Many subprime lenders require one and it can lower the loan amount, resulting in lower monthly payments and reduced interest charges.
Proper preparation is essential when buying a car. If poor credit is preventing you from purchasing a vehicle, remember that bad credit auto loans are designed to help buyers like you.
What do I need to get a car loan with bad credit?
Obtaining a car loan with bad credit can be a challenging process that involves additional steps and documentation. However, it is still possible to secure financing even with poor credit by finding the right lender and meeting their qualifications.
While the qualifications required by subprime lenders for bad credit auto loans may vary, there are some basic guidelines that are typically followed. These include being at least 18 years old, a current resident and legal citizen of the United States or Canada, and having a valid driver's license.
Other requirements may include:
- Proof of income with a current check stub.
- Proof of residency with a current utility bill in your name at the address listed on your application.
- A minimum of six months at your current job, with at least three years of employment history and no major gaps in employment.
- Proof of a working phone number.
- A list of several personal references.
It is important to note that while these are the basic requirements, there are also financial requirements that must be met in order to qualify for a bad credit auto loan. These include a down payment of at least $1,000 or 10 percent of the vehicle's selling price, whichever is less, and being able to comfortably afford a car payment, auto insurance, and other monthly bills.
Lenders use two calculations, the debt to income ratio and payment to income ratio, to ensure that borrowers can afford the loan. Your debt to income ratio must be less than 50 percent, while your payment to income ratio can be no more than 20 percent in order to qualify. It is recommended to calculate these ratios yourself before visiting a dealership as part of budgeting.
Can auto loans improve bad credit?
Auto loans can be a powerful tool to improve bad credit, as they offer the opportunity to build a positive credit history and increase your credit score. To take advantage of this potential, it's important to first understand your credit standing by checking your credit score and report.
Auto lenders often use the FICO credit score, which is determined by five factors: payment history (35%), amounts owed (30%), credit age (15%), credit mix (10%), and new credit (10%). By understanding these factors, you can identify areas that need improvement and take steps to address them.
Getting approved for an auto loan can have a positive impact on your credit in several ways. It can increase your credit mix by adding an installment account, improve your payment history by making timely and full payments, and positively impact the new credit factor by showing recent credit activity.
Additionally, keeping up with all other bills and payments can further boost your credit during the loan term. With consistent effort and time, you can see significant improvements in your credit score and overall credit profile by taking out an auto loan.
How can I buy a car with bad credit?
Having poor credit may make the process of buying a car more difficult, but it doesn't necessarily prevent you from getting an auto loan. However, finding a dealership that is willing to work with individuals with bad credit can be a challenge. Many traditional lenders and dealers are not flexible when it comes to helping people with bad credit purchase a vehicle.
While traditional lenders may use your credit score as the primary factor for approving an auto loan, certain bad credit auto lenders take other factors into consideration such as income, employment, and other financial information. This makes it possible for individuals with bad credit to get approved for an auto loan.
The process of buying a car with bad credit is different from traditional car buying, as the options for financing are limited. Instead of focusing on finding the car you want, it's important to first get approved for financing with a bad credit auto lender.
Keep in mind that most subprime lenders are indirect lenders and can only be accessed through certain dealerships with special finance departments. These bad credit car dealerships are more likely to approve an application for a subprime loan, and Auto Loan Zoom can connect you with one in your area.