Getting an auto loan when you have bad credit isn't as hard as you might think. Knowing what to expect and being prepared to meet the lender requirements are the biggest challenges people often face when they decide to take out a bad credit car loan.
What to Expect of a Bad Credit Auto Loan
If you go into an auto loan knowing what to expect, it tends to be a much smoother process. Things can get a little rough if you're not prepared, or have unrealistic ideas about bad credit car loans.
Here’s what to expect from a bad credit auto loan:
- Lender requirements – Bad credit car loans are available, but they're only available through subprime lenders. Once you find the right lender, you have to meet a variety of qualifications designed to help them determine if you can successfully complete the loan. These subprime lenders look beyond your credit score to factors that show them your ability, stability, and willingness to take out and complete an auto loan. Among these factors are identity, minimum income, residency, and down payment requirements, although each lender has their own specific qualification amounts and stipulations.
- Vehicle requirements – Not all cars are eligible for a loan. Typically, vehicles can have no more than 100,000 miles on them and must not be over 10 years old. Additionally, subprime lenders generally won’t finance less than $5,000 for a bad credit car loan. Vehicle selection isn't the first step when it comes to a bad credit auto loan, either. Once the lender approves you, the dealer lets you know which cars in their inventory you're eligible for. This means you should be flexible with your vehicle choice – now's not the time to finance your dream car.
- High interest rate – When your credit's suffering, you're not going to qualify for the same low interest rates that someone with excellent credit is eligible for. According to Experian's State of the Automotive Finance Market report for the third quarter of 2018, interest rates for subprime and deep subprime consumers ranged between 11.89 percent and 19.72 percent. Even if your credit score sits in the nonprime range (a credit of 601 to 660), you can expect an interest rate between 7.52 and 11.78 percent.
- You might need a cosigner – It's not uncommon for bad credit borrowers to be asked to have a cosigner on their loan. A cosigner is someone who agrees to let you "borrow" their good credit so that you can qualify for a car loan. They don't have any rights to the vehicle, but they’re required to make any payments if you can't or won't, so be careful who you ask. Cosigners need to have good to excellent credit, and their credit score becomes tied to yours through the auto loan. Any actions, good or bad, which affect your credit affect theirs, too.
Preparing for a Car Loan with Bad Credit
Make sure you're prepared for the process when it comes to bad credit financing. There are a lot of things you can do to ensure a smooth process for yourself once you find a lender.
Here are a few tips:
- Look at your credit – Know your credit score, and look at your credit reports. Knowing what the lender sees can help you prepare a budget in a realistic way. Plus, if you find any mistakes on your credit reports, such as accounts that should have dropped off, getting them fixed by the reporting bureau can improve your credit score. The better your credit is, the better chance you have of getting a car loan – even a bad credit one.
- Make a budget – Now that you know your credit score, you can set realistic expectations for your interest rate, which comes in handy when you're budgeting and using an auto loan calculator to see how much vehicle you can afford. Another good budgeting tip: know your debt to income (DTI) and payment to income (PTI) ratios. These are the calculations lenders use to see if you have enough income to comfortably afford an auto loan. DTI shows the percentage of your pre-tax income that's needed for your bills, including an estimated car and insurance payment, and lenders cap this at 45 to 50 percent. PTI shows the percentage of your income set aside for a monthly car loan payment. Lenders don't want this to exceed 15 to 20 percent of your income, before taxes. You can learn more about calculating DTI and PTI yourself here.
- Prepare your supporting documents – You have to prove who you are, what you make, and that you live where you say you live. These formalities play a big factor in your ability to actually get a bad credit auto loan. Come prepared with your valid driver's license, your most recent computer-generated check stub, a utility bill in your name at the address you listed on the application, proof of a working phone in your name, and a list of personal references.
- Bring a down payment – This can be cash, a trade-in with equity, or a combination of both. Most subprime lenders require at least $1,000 down or 10 percent of the vehicle’s selling price, whichever is less. If you can afford a larger down payment, making one helps you save money in the long run. The more money you use as a down payment, the less money you borrow, and less borrowed means lower interest charges over your loan term.
Getting an Auto Loan with Bad Credit
Now that you know what to expect from a bad credit car loan, how do you go about getting one? One of the most hassle-free ways to get an auto loan is to let The Car Connection help. We work with a nationwide network of special finance dealerships that have lenders that can work with people who have bad credit, no credit, or even bankruptcy.
Rather than driving all over town searching for someone to get you the car loan you need, let us do the searching for you. Simply fill out our online auto loan request form today, and we'll get to work connecting you to a dealer in your area that has the lending resources you're looking for!