When you have bad credit, there are a number of qualifications you need to meet in order to get approved for an auto loan. Each lender has their own set of requirements, but most follow the same general guidelines. There are a few details that you need to know about in addition to those, and we’re here to make sure you’re prepared.
The Basics of Qualifying for a Bad Credit Auto Loan
In order to qualify for a bad credit car loan, you have to bring a few documents to the dealership with you. They include proof of income, residence, employment, and a working phone. These things help the lender judge if you have the ability, stability, and willingness to successfully complete an auto loan.
Lenders that work with credit-challenged consumers rely on these factors and not just credit scores to consider loan approvals. Let’s break them down, and take a closer look at what ability, stability, and willingness mean for your next car loan.
Ability to Take on a Car Loan
Your ability to take on an auto loan depends on your income, but not just what’s on your check stubs. Lenders do some simple calculations based on how much money you need for bills each month compared to how much you earn each month. This is called your debt to income (DTI) ratio.
First, lenders require that you earn a certain amount of pre-tax income in order to meet their standards – typically a minimum of $1,500 to $2,000 a month, from a single source. Once you prove you meet it, the lender then compares your income to the amount of money required for current bills, such as rent, loans, and credit card payments.
They’re checking to make sure you have enough available income to cover a combined car loan and auto insurance payment. You can check this yourself by adding up all your existing monthly bills, and dividing the total by your pre-tax monthly income. The resulting number is the percent of your income already needed. Lenders typically don’t approve loans for borrowers who’s DTI ratio, including a car loan and auto insurance payment, is more than 45% to 50% of their income.
Another thing that lenders look at to judge your ability is your source of income. Most subprime lenders prefer that earnings come from a single source of W-2 income, as a regular employee. Only one source is considered for the minimum requirement. If you have multiple jobs or additional sources of income, this may help your DTI ratio, but they don’t help you meet the minimum income requirement.
Stability to Take on Auto Financing
Your work history leads to the next area lenders look at when they’re considering you for a bad credit car loan: stability. Lenders typically require that you've been at your current job for at least one year, and that you've been employed for at least the last three years. On your application, you have to detail your job history and show that there weren't any gaps longer than 30 days between jobs in the past three years.
To accompany a stable employment history, lenders also require that you have a stable residence history – where the vehicle you’re buying is going to call home. You can prove your residence with a current utility bill or bank statement in your name, for the address you put on your application for an auto loan. Subprime lenders also like to see that you’ve been living in the same general area for at least three years.
Why do lenders look for stability? The reason is because car loans are long-term contracts, which you pay off over a number of years. The average auto loan contract is between five and six years these days. Lenders look to see the likelihood that you’re going to live in the same area and have a stable job for the duration of the loan term.
Since no one can see the future, lenders look to the past for a picture of how stable you’ve been. If you seem to have a new job every few months, or have hopped from city to city often, this is viewed as a higher level of risk to lenders.
Every situation is different, though, so there may be reasons for this, such as changing jobs for better pay, or moving around due to employer needs. Lenders can still understand these types of scenarios if you explain the situation.
Willingness to Invest in Success
Some studies have shown that when borrowers are willing to invest their own money into a loan, they’re more apt to make sure it’s completed successfully. Basically, no one likes to throw away money. In a car loan, this means making a down payment.
A down payment is a requirement for nearly every bad credit auto loan. Typically, lenders require a minimum down payment of $1,000 or 10% of a vehicle’s selling price. Often, they accept whichever of these is the lesser amount, but this varies by lender and the borrower’s credit situation.
To make a down payment on your next car loan, you have to use your own money, or the actual cash value of a trade-in. You can also combine vehicle equity and cash to come up with the required amount. One thing you can’t do is to take out a loan for a down payment.
Finding a Dealership for Your Bad Credit Car Loan
As a bad credit borrower, you’re probably going to need a subprime lender to be considered for an auto loan. These lenders only work through special finance departments at dealerships. Not all dealers have one of these, and not all lenders offers loans to people with poor credit. So, how do you tell them apart?
Luckily, you don’t have to, because The Car Connection can do that for you. We're teamed up with a nationwide network of special finance dealerships that have lenders that work with people in unique credit situations. To get help finding one in your area, just fill out our fast, no-obligation car loan request form and let us start the search for you!