When you’re a bad credit borrower, you have to jump through a couple more hoops than other buyers when you want to be approved for a car loan. This might sound like a hassle, but it’s actually a sign that lenders are looking at you, and that you’re more than just a credit score.
You’re More Than a Number
Even though most types of lenders look at your credit score, subprime lenders that specialize in helping bad credit borrowers look to other factors as well. These help them get the full picture when qualifying you for an auto loan. But what exactly are they getting a full picture of?
These lenders are looking to see if bad credit is habitual or situational, and if you have the ability, stability, and willingness to successfully complete a car loan.
What Is Your Credit Affected By?
Bad credit can happen for many reasons. Sometimes those reasons are unexpected, causing a temporary drop in your credit score. This is what is known as situational bad credit. It can happen if you have unexpected medical expenses, if you lose your job, or for any other number of reasons that result in your credit score dropping.
Situational bad credit still lowers you credit score, but lenders are usually more willing to overlook a temporary setback. If your credit reports are otherwise good, they should be able to recognize that this unexpected event is the reason your credit score is down.
On the other hand, if you’ve been struggling to pay your bills, or are constantly making late payments or defaulting on loans and credit cards, this is habitual bad credit.
Habitual bad credit isn’t overlooked as easily as situational bad credit, even by lenders that deal with bad credit borrowers. This is one reason it pays to be as prepared as possible when you’re seeking auto financing.
Are You Prepared to Get a Car Loan?
As we mentioned, lenders check to see if you have the ability, stability, and willingness to take on a car loan. They do this by asking for proof that you can afford to repay a loan, that you have a stable residence where the vehicle is going to be parked, and that you’re willing to invest your own money into a loan.
Let’s take a closer look at what this means and what you have to provide:
- Ability – To show a lender you’re able to take on an auto loan with bad credit, you must provide proof of income. Most subprime lenders ask for your most recent computer-generated paycheck stub showing year-to-date income which proves that you make at least $1,500 to $2,000 a month before taxes from a single job. By using the information you provide, lenders also calculate your debt to income (DTI) ratio. This helps lenders determine if you have enough available income to afford a car payment. DTI compares your gross (pre-tax) monthly income to your bills, and if less than 45% to 50% of your income is being used (including an estimated car payment), then you’re more likely to be considered for a loan.
- Stability – In order to prove the stability necessary for an auto loan, lenders want to know that you have a stable residence, which you can prove by bringing in a utility bill in your name for the address listed on your application. Your residence history in the area is also considered.
- Willingness – Getting a car loan means being willing to show a lender that you’re serious about investing in yourself, and that you want to successfully complete it. It’s one thing to need a loan for a vehicle, but it’s a whole other thing to expect that you won’t have to spend any of your own cash up front. Subprime lenders usually require a down payment to show you’re willing to invest your own money. The amount they need varies by lender and your individual situation, but, at a minimum, most require $1,000 down or 10% of the car’s selling price, whichever is less.
There are a few other qualifications that are typically required for a bad credit auto loan, such as a list of personal references, and proof that you have a working telephone. You can learn more about the requirements of subprime lenders here.
Finding a Dealership in Your Area
Now that you’re aware of what lenders are looking for, you can be better prepared to deal with the application process from the start. All you need to do now is find a subprime lender in your area. Not sure where to start? You’re already in the right place.
At The Car Connection, you can not only get the financing advice you need, but research vehicles and get connected to a local dealership that works with the right kind of lenders.
When you’re ready to take the next step toward a car loan as a bad credit borrower, simply fill out our auto loan request form. After you do, we’ll get right to work matching you with a dealer in your area.