If you think you need to improve your credit in order to get a car loan, think again. It’s possible to get a vehicle without perfect credit as long as you’re working with the right lender.
Lenders that work with bad credit borrowers are called subprime lenders, and they’re a type of indirect lender, which means they aren’t lenders you can apply to directly – you can only work with subprime lenders through special finance dealerships.
Types of Lenders for Bad Credit Car Loans
Just because you have bad credit doesn’t mean that you can’t get auto financing. It isn’t going to be as easy or as cut and dried as financing a car with good credit, but you have far more options than you may think. Typically, you have these choices for getting an auto loan with bad credit:
The first option you should look at is getting pre-approved from a direct lender such as a bank, credit union, or online lender. This is easiest if you choose a financial institution you have an account in good standing with.
Banks and credit unions generally can offer lower interest rates than other lenders, but often these rates are reserved for people with the best credit (especially at banks). In many cases, credit unions are the better option for borrowers with credit issues because they’re smaller and offer more personalized services compared to a bank. However, you do need to be a member of a credit union in order to take advantage of their services.
If you’re able to get pre-approved from a direct lender, it makes the trip to the dealer that much easier. All you have to do is take the loan information from the bank to the dealership and purchase the vehicle you need. This is as close to the process of financing with good credit that you can come.
Indirect lenders are the most common lenders successfully used by bad credit car buyers. As we mentioned, subprime lenders that offer to help people get the financing they need with poor credit are indirect lenders.
Subprime lenders have more qualifications for you to meet than a traditional lender, and you’re likely to have a higher interest rate. Still, getting financed through a subprime lender is usually the best bet when you have bad credit.
Captive lenders are another form of indirect lender. These are the financial subsidiaries of automakers, and are used to help people get loans for their own brands of vehicles. Some of these captive lenders aren’t out of reach for bad credit borrowers – such as Kia Motors Finance, Toyota Financial Services, and Honda Financial Services – and have been known to finance bad credit borrowers in some cases.
In-House Financing Dealerships
In-house financing is done when the dealer is the lender. This is most commonly seen in the form of buy here pay here (BHPH) dealerships. These lenders can typically help people even if they’ve been turned down by other lenders because they usually don't even look at your credit. BHPH dealers are most concerned with whether or not you have the income to pay for a car.
These lenders should be seen as a last resort rather than a go-to, as they typically charge higher interest rates, require a sizable down payment, and are known for being quick to repossess a vehicle if you miss a payment.
Why Subprime Lenders Can Help
Subprime lenders are the go-to for most bad credit borrowers because these lenders understand that not everyone has the credit scores to get a loan; they base your approval on a number of other factors instead.
Auto loans are a game of risk for the lender. Most traditional lenders base approvals on your credit score and how you’ve handled credit in the past, which they can see by looking at your credit reports. Since bad credit borrowers don’t have as much success in the realm of credit, subprime lenders use factors like income, employment, residence stability, and a down payment to determine approvals.
In order to prove that you have the ability, stability, and willingness to successfully complete a car loan through a subprime lender, you need to bring a number of documents to the dealership with you (remember, you’re not meeting with the lender, just the finance manager).
You typically need to bring in the following:
- A valid driver’s license – This serves as proof of identity, and that you can legally drive the vehicle you’re purchasing, since the borrower is listed as the primary driver on an auto loan.
- Proof of income – Provided with a recent computer-generated check stub showing year-to-date income of at least $1,500 to $2,000 a month before taxes. This – combined with a few simple calculations called DTI and PTI – shows lenders that you have the income available to take on a car loan.
- Proof of residency – Lenders need to know that the vehicle they’re helping you finance is going to have a home, one they can find if anything happens. You can verify your residence by providing a current utility bill in your name with the address listed on the application.
- Proof of a working telephone – Lenders also need to be able to get in touch with you. So, to prove to them that there’s a way to do this, they require you to provide a phone bill for either a landline or contract cell phone.
- A down payment – Subprime lenders usually require a down payment, but you don’t have to break the bank. Most require $1,000 or 10% of the car’s selling price, whichever is less.
One last thing most lenders require is a list of five to eight personal references, complete with names, addresses, and phone numbers. These are used in case a lender needs to verify any of your information, other than credit-associated items. Not all lenders call your listed references at the start of your loan, and some references may not even get called at all. As a common courtesy, you should ask before listing someone as a reference.
Getting a Bad Credit Car Loan
As we said, bad credit lenders – like subprime lenders – only work through special finance dealers. Since it’s difficult to tell which dealerships have special finance departments, you may end up driving around in circles searching for a dealer that has the lenders you need. But if you work with us, we can point you in the right direction right from the start.
At The Car Connection, we work with a nationwide network of special finance dealerships that have the lenders you’re looking for. It’s easy to get connected with a local dealer if you simply fill out our no-hassle, obligation-free auto loan request form. Get started now, and be on your way toward the car financing you deserve!