In the excitement of buying your next car, it can be easy to forget to ask a lot of questions about your loan terms, and how much everything costs. As a credit-challenged borrower, you’re likely to have better luck getting financed with a subprime lender that works through a special finance dealership. Since buying a vehicle can get complicated, we’ve got a list of 10 easy questions to help you get started on the right foot when you need a bad credit auto loan.
1. What Type of Income Do I Need?
Bad credit car lenders require earned income, or W-2 income. This means that if you’re self-employed (1099 income), a bad credit lender may not accept it, but this could vary.
If you have a second income, such as alimony, disability, or Social Security, it won’t help with meeting the initial minimum income requirement of a bad credit auto loan. But these incomes can lower your debt to income ratio, which lenders look at to see how much available income you have for payment each month.
2. What Are the Income Requirements?
Every lender varies in their specific income requirements, and the price point of the vehicle you’re looking to purchase could determine how much income you need.
However, to be qualified for a bad credit car loan, lenders usually ask for proof of a minimum monthly income of around $1,500 to $2,500, pre-tax. Be sure to ask about the income qualifications early on, so that you can start to weed out the lenders that can’t work with your situation.
If you don’t quite meet this minimum requirement, having a co-borrower on the auto loan application could be the boost you need to improve your approval chances.
3. Can a Cosigner or Co-Borrower Help Me Qualify or Get Me Better Terms?
You could also ask about adding someone to your loan in the form of a cosigner or a co-borrower. Not only does adding someone with a good credit score help your chances of being considered for a car loan in the first place, they could also allow you to qualify for a lower interest rate.
A cosigner and a co-borrower work differently, so ask your dealer or lender about which option may be best for your situation.
4. What Interest Rates Do I Qualify For?
As a borrower with bad credit, you aren’t likely to qualify for the best interest rates available, but you should still ask for specifics about what you can qualify for. If you have a lower credit score, you may only qualify for a double-digit interest rate, which means a higher monthly payment and possibly paying way more for the vehicle than it’s worth.
It's beneficial to ask your lender or dealer about what you can do to lower your interest rate – those interest charges can add up quickly.
5. How Much Interest Will I Be Charged Over the Course of the Loan?
If you’ve been approved for auto financing, and once you’ve been assigned an interest rate, ask what your total interest charges are going to be. You could also use a car loan amortization calculator yourself, and get an estimate of how much interest you’re going to be charged if you make all your scheduled payments.
Most auto loans are simple interest loans, which means that you’re charged daily interest on the balance of your loan, not the total amount you financed at the start. This means that the amount you’re charged in interest decreases after each payment.
As far as the rate being locked in, most car loans do have set rates, but you should ask the lender or your dealer to be sure.
6. Is There a Down Payment Requirement?
If you’re working with a special finance dealership that’s signed up with subprime lenders, there's typically a down payment requirement. Generally, bad credit borrowers are expected to provide at least $1,000 or 10% of the vehicle’s selling price (or maybe whichever is less).
Remember that you don’t have to meet a down payment qualification with just cash. A trade-in with equity can also cover a down payment or help lower the amount of cash you have to bring to the table.
7. What’s the Value of My Trade-In?
This question is for your dealer, since they’re the ones that give you the actual cash value of your trade-in. When you take your car in to be appraised, they look it over thoroughly, and you’re given an offer.
There’s sometimes room for negotiation if your vehicle is in good shape, and it also helps to give it a quick once-over, but don’t spend too much cash fixing it up. The dealership can usually make repairs for cheaper than you can.
Before you head out, you can go prepared with estimates of your trade-in that you can get online from websites like Kelley Blue Book. If you still owe on your trade-in, be sure to look up the remaining loan balance, and subtract that amount from the estimates you got online.
8. What Documents Do I Need?
As a bad credit borrower, subprime lenders require a variety of items to determine if you’re eligible for an auto loan. While they usually need basic items like computer-generated check stubs, a down payment, and your driver’s license, bad credit borrowers have a few more items they need to bring as well.
Other commonly requested items include:
- A recent utility bill or bank statement in your name with your current address to prove your residence.
- A list of five to eight personal references with contact information.
- A recent phone bill in your name for a contract cell phone or landline to prove you have a working phone.
Your unique, personal situation could mean bringing in more or less items, so be honest with the dealer if you’re working toward a bad credit car loan. Subprime lenders are equipped to handle many different types of bad credit scenarios, but the more up front you are, the quicker you can gather all your items and move forward in the vehicle buying process.
9. Can I Make Extra Payments Without Penalty?
Occasionally, there are auto loans that come with penalties for paying it off early, or penalties for making extra payments. While this isn't super common anymore, it doesn't hurt to ask. Paying off your loan early can mean savings in interest charges, and you should know if it's an option for you.
10. What Are My Payment Options?
Depending on the type of dealership you decide to go with, they may have different payment options. There are some dealers, like buy here pay here dealerships, that may require you to make the car payments at the actual location.
Ask your dealer about the ways you can make your payments. Many offer online, mail in, or simply in person payment options. If you have a busy schedule and it’s required that you make the payments in person, it may be in your best interest to consider another dealership. Late payments can really lower your credit score – and if your credit is already bad, it could mean trouble if you can’t get to the dealer in time!
Feeling More Prepared?
Now that you have a list of questions to ponder and prepare to ask, you can start to look for a dealership with bad credit lending options. But how can you tell which ones have the lending options you need? Not to worry – we’ve got you covered.
Here at CarsDirect, we have connections with dealers across the country that are signed up with bad credit auto lenders. To get matched to a dealership near you, fill out our free car loan request form. Our form is secure, and there’s never an obligation to buy anything, so start your vehicle hunt now!