The steps you need to take to get your credit back on track after a bump in the road might depend on how it took a downturn in the first place. There are two main types of bad credit – situational and habitual – and your options for an auto loan can vary depending on which one you have.
What Kind of Credit Do You Have?
If you have a low credit score, there are a number of factors that could be holding it down. Even though people with credit scores below around 660 are typically referred to as bad credit borrowers, the term bad credit is almost a blanket statement – not all bad credit is equal. It's not all treated the same by lenders, either.
There are two main types of bad credit: situational bad credit and habitual bad credit.
Situational Bad Credit
This type of bad credit typically occurs when you have things happen outside of your control, such as unexpected job loss (thanks COVID), hospitalization, or medical bills, that ultimately result in your credit score going down.
When lenders review your credit profile, they can often tell when something has changed about your financial situation or stability, based on previously good credit. These types of bad credit borrowers often have a better chance of being approved for lending than their habitual bad credit counterparts.
Habitual Bad Credit
Habitual bad credit borrowers are more likely to have a long and consistent history of low credit scores and poor financial health, such as late or missed payments, multiple short-lived credit accounts, numerous defaults, and possibly a repossession or bankruptcy showing on their credit reports.
These borrowers also tend to over-apply for credit, rather than carefully choosing which accounts are necessary to apply for responsibly. Applying for too much credit can keep an already low credit score down, and make an approval more difficult to come by.
Getting a Car Loan With Situational Bad Credit
If you're a borrower with situational bad credit, you're more likely to qualify for a car loan the way many people think of as the "traditional" auto loan scenario – getting a direct loan through a bank, credit union, or online lender. If you're able to qualify for these loans, you're essentially turned into a cash buyer who can take their loan and get a vehicle from any dealership or private seller.
In cases like this, you may also be able to look at more franchised dealers that work with captive lenders, such as Kia Motors Finance and Ford Motor Credit. These lenders aren't always the right choice for borrowers with bad credit, but if you're on the upper end of the bad credit scale, some captive lenders are willing to take up the challenge. Plus, you may qualify for a bad credit lease, too (but it's rare with bad credit of any kind).
With these options (and any other), you're still going to have to adhere to bad credit lending qualifications. You're also likely to be required to have a down payment, and maybe even a cosigner. Additionally, your interest rate is generally going to be higher than it might’ve been before you were plunged into a bad credit situation.
Habitual Bad Credit and Auto Loans
If you're under the habitual bad credit category, it may be even more difficult for you to qualify for a direct loan or a loan through a traditional lender with captive financing. In fact, depending on your past credit habits and how low your credit score is, you may be turned down by some subprime lenders, too.
Don't fret, though, you still have options.
If you're having trouble qualifying for a car loan, you may need to try a buy here pay here (BHPH) lot. Also known as a tote the note dealership, these used vehicle lots offer in-house financing. This means your dealer is the lender. These BHPH lots often make a good choice for borrowers with very low or no credit because they usually don't check your credit at all.
There are trade-offs for not having your credit pulled, though, and they typically come in the form of a large down payment requirement and a higher than average interest rate.
Even though this may not be ideal, it can be a good option for a borrower who's dealing with habitual bad credit and can’t get approved anywhere else. Unfortunately, since these dealerships don't always check your credit, they also may not report your on-time payments, which means credit improvement isn't likely.
BHPH lots aren't your only option with habitual bad credit. Subprime lenders have the ability to help borrowers in all kinds of credit challenges.
Special Finance Dealerships for All Types of Credit
No matter which type of bad credit you have, a special finance dealer that's signed up with subprime lenders is likely to be the step you need to take in order to get an auto loan with poor credit. The lenders at these dealerships are prepared to work with people in many types of bad credit situations.
Subprime lenders know that you're more than just a credit score, and look at additional factors to determine your car loan eligibility. They're looking to see if you have the ability, stability, and willingness to take on an auto loan by asking for proof of income, employment, and residency. Typically, you're also required to make a down payment and have personal references a lender can contact.
One key to making the bad credit car loan process more smooth is to be prepared. This means doing your research, knowing where your credit stands, and gathering all your documents before you ever set foot in a dealer.
In fact, finding the right dealership that's signed up with subprime lenders can often be a challenge in itself. However, that's one problem we can assist you with.
Let Us Guide You Toward Special Financing
When you need a bad credit auto loan, The Car Connection wants to help. We've spent years cultivating a large network of special finance dealers all across the nation that are signed up with the subprime lenders you need.
Don't waste time going from dealership to dealership getting turned down – start here instead. The process is fast, free, and comes with no obligation. Take the first step by filling out our secure car loan request form today.