Bad credit shouldn't hold you back from getting an auto loan. If you need a vehicle and are struggling with credit issues, you should apply for a bad credit car loan. It increases your odds of getting approved, and can be more affordable than other types of auto loans. Plus, it can even improve your credit score!
Bad Credit Car Loans vs. Traditional Auto Loans
When you have poor credit, you need to find a lender that can work with your situation. Not all auto loan lenders can help people who have bad credit, and those that can aren't found at every dealership. Typically, you have to work with a subprime lender to get a bad credit car loan. These lenders are signed up with special finance dealers, rather than through a bank or credit union.
The reason subprime lenders can help is because, unlike traditional direct lenders (banks and credit unions), they rely on more than just your credit score to consider you for an auto loan. Traditional lenders at financial institutions tend to base loans simply on good or bad credit and the majority of their loans tend to go to borrowers with the highest credit scores.
When you're going through a bad credit lender, they have certain requirements and stipulations that you need to meet. These show them that you're in a stable living and employment situation, that you make enough income to cover the monthly payment, and that you're willing to have some skin in the game.
Specifics vary by lender, but you typically need to provide proof of income, proof of residence, and proof of a working telephone, along with a valid driver's license, a list of personal references, and a down payment.
BHPH Dealers vs. Bad Credit Auto Loans
One choice for getting a bad credit auto loan is a buy here pay here (BHPH) dealer. These are in-house financing dealerships where the dealer is also the lender, which means they don't rely on third-party lenders.
These car lots can be a go-to for many people in bad credit or no credit situations, since many BHPH dealerships famously don't rely on credit for approval. This isn't true at all BHPH lots, but when it is, the lack of a credit check has some trade-offs – typically, a higher interest rate and larger down payment requirement.
Due to not checking credit, you may find that BHPH dealers charge higher interest rates than other bad credit lenders. With poor credit, your interest rate is expected to be higher than someone with good credit anyway, but many BHPH lots are at the top of this scale.
Additionally, the amount of your down payment is usually determined by the price of the vehicle you choose. You may be required to put down around 20% of a car's selling price.
At a BHPH dealership, used vehicles are your only choice, and the selection varies by lot. You could find mostly high-mileage, older used cars or you could find some newer models. No matter which vehicle you choose, these cars come as is with no warranty.
That's not to say there's no benefit to getting a vehicle from a BHPH lot. These dealers can often make quick work of the auto loan process because they're not waiting on outside lender approval. This means they're a good one-stop shop if you need a car quickly.
Bad Credit Car Loans Offer More Choice
If you have the time to shop for your car, you may want to opt for a bad credit auto loan from a subprime lender. When you visit a special finance dealership that works with these lenders, you have a better chance at a selection of both new and used vehicles. This often includes certified pre-owned cars, which are newer, low-mileage used vehicles covered by some form of manufacturer-backed warranty.
You can also expect your interest rate to fall below the rate you may find at some BHPH lots. As for a down payment, it's still required, but subprime lenders generally only ask for $1,000 or 10% of a car's selling price down, sometimes whichever is less.
Improve Your Credit With a Subprime Auto Loan
Even though a bad credit car loan is possible, borrowers with lower credit don't often have the opportunity to get some of the deals that are available for borrowers with better credit. But, you have to start somewhere, so why not do so with a loan that can help you build a solid payment history and improve your chances of getting those deals next time around?
Payment history is the largest factor that makes up your credit score, accounting for 35% of it. Based on the FICO scoring model, which is most commonly used among auto lenders, your credit score can range from 300 to 850. "Bad credit" is a rather large chunk of the range; anyone with a credit score of around 660 and below typically has a better chance at a car loan through a subprime lender.
The good news is that by getting a bad credit auto loan, you're given the opportunity to make large payments consistently and for a long period of time. Each on-time payment can build your credit score, assuming you're keeping up with the rest of your bills, too.
Not only that, but getting a car loan from a subprime lender also satisfies some of the other factors that go into your credit score, such as opening new credit, and adding an installment loan to your credit mix (each make up 10% of your credit score).
Ready to Get Started?
Now that we've laid out some of the benefits of getting a bad credit car loan, it's time to get the process started! You can skip the hassle of searching for a dealer on your own with The Car Connection.
We're teamed up with a national network of special finance dealerships that work with subprime lenders. Let us connect you to a dealer in your area! Get started by filling out our free and easy auto loan request form.