When you want to build credit but you’re struggling to get started, a subprime auto loan could be the answer.
How Auto Loans Affect Your Credit Score
It’s relatively common for new borrowers with little credit history to ask a cosigner to help them get approved for their first car loan. However, if you don’t have this luxury, a subprime auto loan could help you kick-start your credit.
Most car loans are installment loans – loans that you pay back in a fixed time period with predetermined fixed monthly payments. They’re typically larger loans, and since they normally take a while to pay off, auto loans can help you build a nice payment history.
Payment history is the biggest factor that determines your credit score, and it’s determined by the information listed on your credit reports. The FICO credit score is the most commonly used scoring model by lenders, and ranges from 300 to 850. If your credit reports are thin, meaning you haven’t applied for much (or any) credit, your score is likely somewhere in the lower-mid range.
With a score in that range, it can be difficult to find a lender to work with. If you have a bad credit score or are lacking credit history, many traditional lenders may not want to assume the risk of lending to you. Thankfully, there are subprime car loans that help borrowers get into the vehicle they need and get on track to build (or rebuild) their credit.
Special Finance Dealerships
Many traditional lenders only finance borrowers with good credit, but there are also subprime lenders that work with bad credit borrowers. These bad credit lenders work through a dealership’s special finance department and use more than just your credit score to make loan decisions.
Since your credit score is a reflection of your ability to repay borrowed money, lenders take what’s on your credit reports seriously. Thankfully, negative marks on your credit history are only typically listed for seven years, and with each passing year, the negative effect lessens. However, a few negative marks could be the difference between an approval and a denial for a traditional auto loan. Subprime lenders, on the other hand, have the ability to work with borrowers in all sorts of unique credit situations including bankruptcy, divorce, an old repossession, bad credit, or a lack of credit.
Subprime car loans are also reported to the major credit reporting agencies – your payment history and the loan are both reflected on your credit reports. If you keep up with the monthly loan payments and complete the loan, your credit score and history reflect this, and it improves your credit score. A completed auto loan also looks great on your credit reports, telling lenders you’re a responsible borrower for future loan opportunities.
Finding a Bad Credit Car Loan
Not all dealers have special finance departments, and it can be hard to tell which ones have these lending options – that’s where we come in.
At The Car Connection, we’re connected to dealerships across the country that are signed up with subprime lenders. If you’d like to start building your credit history with a car loan, start with us. To get matched to a dealer in your area, simply fill out our free auto loan request form. It’s secure, quick, there’s never an obligation to buy.