Keep This in Mind when Getting a Bad Credit Car Loan

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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.


, - September 11, 2019

As a car buyer, there are some things you need to keep in mind when you’re looking for a bad credit auto loan. Here are six things you need to know if you're financing a vehicle with bad credit.

The First Step Starts at Home

Whether your credit is good, bad, or downright ugly, you need to know your credit score and what's on your credit reports before you even think about car shopping. Being prepared goes a long way when you're looking for an auto loan, and knowing your credit is the first step.

If you don't know what lenders see when they look at your credit, you don't know the average loan terms or interest rates typically offered to borrowers in your credit range. You also won't have a leg to stand on when negotiating your car loan.

Once you know your credit score and what's on your credit reports, you can check the typical auto loan rates and terms for people in situations similar to yours. Knowing this, you can get a more accurate estimate of how much vehicle you might be able to finance by entering this information in our Car Loan Calculator.

Keep in mind that online tools only give you an estimate, and your actual loan terms are going to vary by lender. To check if you can truly afford the cost shown by a loan calculator, you should create a budget. You can do this with the help of your debt to income (DTI) and payment to income (PTI) ratios.

DTI and PTI can help you determine how much of your income is available to spend on an auto loan. DTI compares the bills you're already paying – plus the estimated car loan and insurance payments – to your gross (pre-tax) monthly income. Simply add up all your regular monthly bills, plus the estimated auto loan and insurance payments, and divide the total by your gross monthly income. If the results are more than 45% to 50% of your income, a lender isn't likely to approve you for a loan.

PTI lets you see how much of your income is going to be needed for your car loan payment. For this, divide your estimated auto loan payment by your gross monthly income. Lenders aren't likely to approve you if the payment requires more than 15% to 20% of your income, and the lower your PTI, the better. Believe it or not, lenders want you to be able to comfortably afford a car loan.

Don't Go to the Dealership Empty-Handed

Once you're ready to head to a dealership to get financed, you need to be prepared. With bad credit, you likely need to work a subprime lender, and they only offer loans through special finance dealers. One reason subprime lenders are good for people that struggle with credit is because they base auto loan approvals on factors beyond credit scores.

These factors, such as income, employment and residence stability, and willingness to make a down payment, give these lenders additional information to base an approval on. You're also going to need to bring in documentation to back up the information on your application.

The requirements of subprime lenders vary, but they typically need:

  • Proof of income – A recent computer-generated check stub showing year-to-date income.
  • Proof of residency – A current utility bill in your name at the address on your application.
  • Proof of a working telephone – A current phone bill in your name for either a landline or contract cell phone at the address on your application.
  • Personal references – A list of five to eight personal references with names, addresses, and phone numbers, though none can be living at your address.
  • A valid driver's license – To verify your identity.
  • A down payment – To show you're willing to invest in your own success, subprime lenders almost always require a down payment. Generally, subprime lenders require $1,000 down or 10% of the vehicle's selling price, whichever is less.

Another thing to keep in mind is that some lenders may also require you to have a cosigner or co-borrower. These are people who share the payment responsibilities of a car loan with you, and help give you a boost in either credit score or qualifying income, depending on your situation.

Keep in Mind That When You Have a Bad Credit Car Loan...

In addition to what we've touched on, there are a few more things you should think about when you need a bad credit auto loan. Keep in mind that there's more to the price of a car than what it sells for. You need to be sure you can afford the cost of fuel, maintenance, and repairs, so plan accordingly before you sign on the dotted line.

Full coverage auto insurance is also required whenever you finance a vehicle. Full coverage is more expensive than insurance policies with liability coverage. The amount of coverage you're required to carry depends on the state where you live.

Find the Dealer You Need

Now that you know all you should think about when preparing to finance a car with bad credit, the next thing to do is find the right lender. As we mentioned, you’re better off working with a subprime lender when you're struggling with credit issues, and these lenders only work through special finance dealerships.

Sometimes, it can be difficult to tell which dealers have the lenders you need. That's where we come in. Here at CarsDirect, we specialize in helping people get the financing they need by connecting them to dealerships in their area that have the right kind of lenders.

You can get the process started today by filling out our fast and free auto loan request form. Don't wait any longer to get connected to a local dealer from our nationwide network.

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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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