Although your credit score might not be the best, it doesn’t always mean you can’t get into the car loan you need. There are options for many bad credit borrowers – you just need to know where to look.
Bad Credit Auto Loans
Traditional lenders, such as automotive captive lenders or your bank or credit union, may only finance you for a car loan if you’ve got great credit. It’s definitely a bummer, but you may be able to qualify for a bad credit auto loan. These loans can improve your credit and help you qualify for the best rates in the future.
Car loans can be a great way to improve your credit score. They typically last for a few years, and can help to rebuild your credit by adding years of good payment history to your credit reports. You just need to find a bad credit lender that reports auto loans to the credit reporting bureaus!
There are a few options you can explore as a bad credit borrower. One common route you can take is going through a buy here pay here (BHPH) dealership, also known as no credit check used car lot. These lots have in-house financing, which means the dealer you work with is also your lender.
Another option to explore is a dealership with a special finance department. These departments work with subprime (bad credit), third-party lenders. These dealers aren’t everywhere, but a bad credit auto loan has the potential to improve your credit score.
Pros and Cons of BHPH Dealers
Since these dealerships don’t rely on third-party lenders, BHPH dealers don’t typically review your credit reports or use your credit score during the approval process. This can be great news for borrowers with a really bad credit score, a recent repossession on their credit reports, or those who have had multiple bankruptcies.
However, if you decide to go through a BHPH dealership, know that they may not report your loan to the credit reporting agencies. This means that a good payment history may not be reflected on your credit reports, and your credit score won’t improve. While the loan may not be reported, missed and late reports are very likely to be reported and can harm your credit score.
If you want your credit history to show on-time payments, ask your BHPH dealer if they report to the credit bureaus before you buy. Another thing to keep in mind is that you’re only going to be able to finance a used vehicle, and your interest rate is likely to be much higher than the average used car rate.
Also, be prepared to prove a steady income with check stubs, and provide a down payment of up to 20% or more of the vehicle’s selling price. While BHPH dealerships may not check your credit, they do check income and always require a down payment to qualify.
Pros and Cons of Bad Credit Car Loans
To get approved by a subprime lender, you’re going to need to find one. They’re more available than they’ve ever been, but it can be hard to tell the difference between dealers that have these lending options and those that don’t.
Once you locate a special finance dealership, you submit your information to the dealer, and they send it to one or more subprime lenders. Your credit reports are reviewed, and if you qualify based on your income and overall financial/living stability, your dealership is given a payment call from a subprime lender that can work with your credit and financial situation. From there, you choose a car on the lot that fits that payment call, which is your maximum monthly budget.
Most subprime lenders also require a down payment, usually at least $1,000 or 10% of the vehicle’s selling price (sometimes whichever is less). The minimum monthly income requirement is typically between $1,500 and $2,000 before taxes from a single source. Unlike a BHPH dealer, subprime lenders review your credit reports, and use them to determine your ability to repay an auto loan.
As a bad credit borrower, you’re more likely to get financed for a used car with a subprime auto loan, but it’s also possible to get financed for a certified pre-owned, or CPO, vehicle or even a new car. What you qualify for is largely dependent on your monthly income, your bills, and your credit score. But since some subprime lenders work through franchised dealerships, you’re likely to have more vehicle options than at a BHPH lot.
Additionally, subprime auto loans are reported to the major credit reporting agencies. Again, with on-time, consistent payments you can improve your credit score. A completed car loan looks great on your reports, and increases your chances of approval by traditional auto lenders. A higher credit score can also help you qualify for better rates for all sorts of credit opportunities.
Getting Into Your Next Car Loan
Now that you know your car loan options as a bad credit borrower, you can start to look for a dealer that can work with you. To save you time and hassle, start with us at The Car Connection.
We’re connected with dealerships nationwide, including BHPH dealers and special finance dealerships, and we can match you to one near you for free. To get started, complete our secure, zero-obligation auto loan request form.