Long story short, there is a difference between no credit and bad credit. Both tend to lead to lower credit scores, which could cause issues if you’re trying to get approved for an auto loan. However, there are lenders that can work with credit-challenged borrowers.
No Credit vs. Bad Credit: Their Differences
When it comes to what’s on your credit reports, lenders take it seriously. Your credit reports serve as a detailed history of how you're handling bill payments, collection accounts, and credit. Your credit reports typically show a seven- to 10-year snapshot of your credit situation.
If you have no credit, it’s called having a thin file because your literal credit file is thin. It also means you probably don’t have a lot of negative marks on your reports – which is a good thing! However, since you don’t have much on your credit reports, it also means that lenders aren’t sure how you’re going to handle repaying credit.
Your credit score reflects this thin file, producing a lower credit score that’s often in the lower-to-middle, or subprime, range. That is, if your credit history is scorable in the first place. Lenders can usually tell the difference between a low score due to a thin file and a bad credit score due to other reasons.
Having bad credit, on the other hand, means there are negative marks on your credit reports that are from things other than a lack of accounts. Bad credit can be either habitual or situational.
If you have missed or late payments on accounts and they’ve been reported to the credit bureaus, it hurts your credit score. A long history of this points to habitual bad credit, and lenders look at your credit score and reports to see what caused the lower credit score.
As a bad credit borrower, you may run into some issues overcoming the negative impacts on your credit history, since missed or late payments can be red flags to lenders. They want to make sure that if they approve you for a loan, you’re going to make the payments on time. If you don’t have the best track record as far as making payments on time or you’ve defaulted on loans before, traditional lenders may turn you away.
How Your Credit Is Viewed
When it comes to how auto lenders view no credit vs. bad credit, no credit is generally viewed with higher favor. Borrowers have to start somewhere, and many first-time borrowers start off their credit history with a car loan.
Whether you have no credit or bad credit, traditional auto lenders can be tentative to approve you for a car loan. Most banks or credit unions prefer borrowers with good credit, and the captive lenders of many automakers do, too.
This doesn’t mean you’re out of luck when it comes to auto financing, as there are lenders for no credit and bad credit borrowers. If you’re a no credit borrower or a bad credit borrower, subprime financing could be your next step in getting into a vehicle.
Subprime Lenders and Car Loans
Subprime lenders specifically work with borrowers with less than perfect credit, and also unique credit situations like a bankruptcy or past car repossession. They operate remotely through select dealerships that have special finance departments, and can typically help because they look at more than your credit score. They do look at your credit reports, but they also evaluate much more than that.
Before you can be considered for auto financing, you’re still going to need to meet the lender’s requirements, and prove your information with documents. A subprime lender may ask you about your credit reports, work history, residence history, and more, as well as have you provide proof of income and a down payment.
Some common items requested that can help the lender determine if you can take on a car loan typically include:
- A recent computer-generated check-stub that also shows year-to-date income.
- A recent utility bill or bank statement in your name.
- A recent phone bill in your name (prepaid phones aren't accepted).
- A down payment of at least $1,000 or 10% of the vehicle’s selling price (sometimes whichever is cheaper).
- A list of five to eight personal references with names, addresses, phone numbers, and email, etc.
- A valid driver’s license with your current address (not revoked, suspended, or expired).
Once your information and proofs have been all verified, a subprime lender that can work with your situation sends the dealer a payment call. This lets the dealership know the maximum monthly car payment that you qualify for, and the dealer can help you choose a vehicle from their inventory that fits your needs.
Finding a Bad Credit Dealership
Aside from getting into your next car, going with a subprime lender could also be a chance for credit repair. Subprime auto loans are reported to the major credit reporting agencies, which means that if you make the payments on time, you can improve your bad credit, or start your thin credit file off with a bang.
Ready to start your next car loan? Finding a special finance dealership that’s signed up with subprime lenders could be difficult, but it doesn’t have to be if you start with The Car Connection. Once you complete our free auto loan request form, we’ll look for a dealer in your local area that has the lending options you need. There’s never an obligation to buy anything, so let’s get to work!