If you're going through credit challenges, it might be hard to imagine getting the car loan you need right now. When you have poor credit, getting a loan for a big-ticket item like a vehicle can be difficult. However, if you get the auto loan you're looking for, it could be your key to improving your credit.
Getting a Bad Credit Car Loan
When you have less than perfect credit, a car loan can be more difficult to qualify for because not all lenders work with bad credit borrowers. The lenders that do work with poor credit, however, know that there's more to a person than just their credit score. Finding one of these subprime lenders means going through a special finance dealership.
You have to meet a number of requirements in order to be considered for auto loan approval from a subprime lender. The requirements are based on your ability to afford a car loan, the stability to see it through, and willingness to invest in it up front.
Specific qualifications can vary by lender, but most subprime lenders require:
- Income – A minimum of $1,500 to $2,000 a month before taxes from a single source is required. Additionally, lenders want to make sure that you have enough available income to cover the monthly payment, so if more than 45% to 50% of your income is already being used for bills, you may not qualify. Proof of income is required with a computer-generated check stub showing year-to-date income.
- Employment – Lenders generally insist that your available income is from W-2 employment. They typically require at least six months to one year on your current job, with a minimum work history of three years. Your work history usually can't have gaps of more than 30 days between jobs in order to qualify.
- Residence – Lenders require proof of residence with a utility bill, phone bill, or bank statement in your name, at the address used on your auto loan application.
- Phone – It's important that a lender is able to contact you whenever necessary, so they require proof of a working landline or contract cell phone with a recent bill in your name.
- References – Most lenders ask that you provide a list of at least five to eight personal references. This must be complete with names, addresses, work and personal phone numbers, and email addresses.
- Down payment – Bad credit loans generally require a down payment. Subprime lenders typically ask for at least $1,000 or 10% of the vehicle's selling price, whichever is less.
How an Auto Loan Helps You Improve Credit
So, how does getting a car loan with bad credit help you improve your credit score? In many ways, actually. To understand why a loan can help, you need to know a little bit about how credit works.
Credit is a record of how you handle finances. It's made up of two parts: your credit reports and your credit score. The information on your credit reports is used to determine your credit score, which can range from 300 to 850. Anything below 620 is typically classified as poor credit.
In order to come up with your credit score, the information in your credit reports is measured. It's made up of five areas: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Here's how an auto loan impacts some of these factors:
- Payment history – Building a solid track record of positive payments is the biggest contributor to good credit. A car loan helps by allowing you the opportunity to make on-time payments over a long period of time.
- New credit – An auto loan counts as a new line of installment credit, which, handled responsibly, adds to your overall credit history in a positive way.
- Credit mix – Lenders like to see borrowers responsibly handling both installment credit, such as mortgage and car loans, and revolving credit from credit cards. Financing a vehicle adds an installment loan to this mix.
When you handle a car loan responsibly, it can mean a big improvement for your credit as long as you're keeping up with your other bills. Though not listed above, length of credit history improves with each year that you're using credit, and this can also be improved with an auto loan.
Finding Your Next Car Loan
Now that you know what it takes to get a bad credit car loan, and how it can help you improve your credit score, it's time to find your next loan. If you're not sure where to start, we can help.
The Car Connection works with a large network of special finance dealers that have the lending resources available to help people with unique credit situations such as bad credit, no credit, and bankruptcy. Save yourself time and hassle by letting us help you get connected to a local dealership.
The no-obligation process is fast and free. You can get started right now by filling out our auto loan request form.