How Do Bad Credit Car Loans Work?

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Even with poor credit.


Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

, Automotive Content Editor - August 9, 2021

So you decided it's finally time to finance a vehicle. First, congratulations! Getting a car loan can be a big step whether you're 18 or 83, so we're here to blow away the fog and lead you on a clear path towards a bad credit auto loan.

Bad Credit Car Loans Are Different

When you're struggling with bad credit it can be difficult to get financing for the things you need, such as a car. Traditional lenders, such as banks, credit unions, and the captive lenders of some automakers, typically reserve their auto loans for borrowers with better credit scores, around 660 or higher.

When borrowers think about auto loans, they often imagine picking out a car, getting a loan from the bank, taking the cash in hand, heading to a dealership, and driving away in their new (or new to them) vehicle. This traditional auto loan process is similar to what happens for good credit borrowers.

However, as a bad credit borrower, the process is almost reversed.

As a borrower with a lower credit score, you need to qualify for financing before you can choose a vehicle. The process typically begins with finding a subprime lender through a special finance dealership. These lenders specialize in helping borrowers get the auto loans they need, even if they have little to no credit, or negative marks on their credit reports.

Starting the Bad Credit Car Loan Process

Once you're at a dealership that works with bad credit lenders, you need to provide some information so that the lender can determine whether you qualify for a car loan or not. Generally, subprime lenders all have similar base requirements, though some specifics may vary.

Usually, you need to provide proof that you're able to repay the loan, have a steady living situation, and that you're willing to have some skin in the game with a down payment. It pays to be prepared for these things before you head to a dealer's lot.

Gather these documents to help your bad credit auto loan process go more smoothly:

  • Pay stubs – Most lenders require your most recent 30 days' worth of check stubs showing year-to-date income. The minimum income requirement is typically around $1,500 to $2,500 a month before taxes.
  • Proof of residency – This requirement is designed to prove to lenders that you have a permanent address where the vehicle usually resides. You can prove this by bringing in a current utility bill or bank statement in your name, for the address listed on your application.
  • Proof of a working telephone – This is to provide proof that you can be contacted by a lender, no matter what. Most lenders require that you have a contract cell phone or landline in your name. Prepaid phones don't meet this requirement as far as bad credit lenders are concerned.
  • A down payment – Down payments are almost always required for borrowers with poor credit. Usually, you're required to bring in at least $1,000 or 10% of the vehicle's selling price. This is called skin in the game, and borrowers who provide a down payment are statistically more likely to complete their auto loan successfully.

Though not a requirement for loan qualification directly, most subprime lenders ask for between five to eight personal references, complete with names, addresses, and phone numbers. References can generally be anyone, as long as they don't share your address. You're also required to provide a valid driver's license as proof of identity.

Once you complete the application process with the dealership (typically with the finance and insurance manager), the lender reviews your documents and returns a decision to the dealer through a payment call. This call outlines the maximum monthly payment you qualify for, and the dealer selects some vehicles from their inventory that fit within those parameters. You can then choose the vehicle that best fits your situation and take delivery!

Tips for a Better Bad Credit Auto Loan Experience

Here at CarsDirect, we work with borrowers of all kinds to help streamline your car loan experience. We know firsthand how important getting an auto loan can be when it comes to starting your car buying and credit repair journey. The process can also be tough if you feel like you're going it alone or have never financed a vehicle before.

Here are five tips for making the most of your car loan journey:

  1. Know where your credit stands. When you know your credit score and what's on your credit reports, there's less chance of surprise when you're talking about financing and interest rates. Your interest rate is largely based on your credit score, so by knowing what yours is, you eliminate the opportunity for an unscrupulous dealer or lender charging too high of an APR. Coming in with your eyes wide open also allows you to do some research before starting the process, so you aren't caught off guard by the higher interest rate you typically receive with lower credit.
  2. Ditch the expectations. No two auto loan processes are exactly the same, because your situation is unique to you. What you should do is plan on spending some time at the dealership, and don't be surprised if you need to make more than one trip before you drive home in a vehicle. You can make the process go more smoothly by being prepared and being realistic about your car choice. When you're trying to get a bad credit car loan, focusing on getting an affordable, reliable vehicle – it's not the time to finance your luxury dream car.
  3. Stick to your budget. When it comes to getting a subprime car loan, most lenders have requirements concerning how much of your current income is being used by your existing bills, loans, and expenses. This is called your debt to income (DTI) ratio and you can find yours by dividing your total monthly expenses, including an estimated car loan and insurance payment, by your gross monthly income. Most bad credit lenders require that you have at least 45% to 50% of your income available to qualify for financing. Many lenders also require that your combined car and insurance payments take up less than 20% of your monthly income, but the less it uses the better – this is called your payment to income (PTI) ratio, and you can learn more about it here.
  4. Talk about trade-ins separately. If you're coming into a bad credit auto loan situation and have a trade-in, it's a good idea to negotiate the price of your next car (and get it in writing on a buyer's order), before you mention you have a vehicle to trade. This way, the total amount you get out of your current car can go toward lowering the price of your next auto loan. Whether you own your car or not, any equity can be used as a down payment, or part of one, on your next vehicle.
  5. Don't go it alone. If you're struggling with a low credit score, having a cosigner on deck to help lend you their good credit score can help you qualify for a car loan, or help you to qualify for better rates and terms. A cosigner doesn't have ownership of the vehicle and only acts as peace of mind for a lender since they agree to make payments if you can't. Cosigners must be able to qualify for the loan, so they typically have to meet the same lending qualifications as you. If it's money, and not your credit score standing in your way, a joint auto loan with a co-borrower who does own the car with you may be the way to go. This is usually a spouse or life partner since lenders combine your incomes to meet their qualifications.

Let CarsDirect Be Your Guide

Now that you know more about the bad credit auto loan process, you can confidently go into your next buying experience! If you're not sure how to get started, we can help you with the first step.

At CarsDirect, we have been a leader in the subprime automotive space for over 20 years, and have built a coast-to-coast network of special finance dealerships that are ready to get you into the car loan you're looking for. These dealers are signed up with lenders that know how to help in many unique credit situations.

The process is fast, free, and easy to get started. Simply fill out our auto loan request form, and we'll help connect you with a local special finance dealership for your next car-buying experience.


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, Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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