Types of Auto Loans for Bad Credit Borrowers

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Senior Auto Financing Editor

Beth is a content manager and writer for Auto Credit Express, CarsDirect, and other automotive blogs emphasizing financing and car loans for consumers with subprime credit. She is a graduate of the University of Michigan in Flint, with a bachelor’s degree in English writing.

, Senior Auto Financing Editor - April 30, 2020

Having bad credit doesn’t always mean you’re unable to get an auto loan. There are lenders that often can work with a borrower’s unique credit situation. We go over the main types of auto loans for bad credit borrowers.

Bad Credit Auto Lenders

With a lower credit score, it can feel like you can’t get an auto loan. In many cases, this simply isn’t true, but you may have to work with a lender that specializes in bad credit car loans to get financing.

There are two types of auto lenders: direct and indirect. There is also in-house financing available at buy here pay here (BHPH) dealerships. We’ll go over each in detail to help you find a lender that works best for you.

Direct Lenders and Bad Credit

Direct lenders are banks, credit unions, and some online lenders. With a direct loan, you apply directly, and if approved, you take a check for the vehicle to the dealer or private seller. Getting financed with a direct auto lender may be more difficult if you have a bad credit score, though.

These lenders typically finance borrowers with good to excellent credit scores. It’s not impossible to get financed from a bank or credit union, but it helps if you’ve been a member for a while and your account(s) is in good shape.

These lenders also may or may not require a down payment for a car loan – it depends on your credit and how much you’re looking to finance.

Indirect Lenders and Bad Credit

Indirect lenders are also known as third-party lenders. These include subprime lenders and automotive captive finance companies (think GM Financial).

An indirect lender works through a dealership’s finance department. Captive lenders usually only approve borrowers with good credit. Some captive lenders just use a borrower’s credit score for a loan decision – they may not even check income during the approval process. Some captive lenders may not require a down payment if your credit score is high enough, but this varies.

However, if you have bad credit and you need to work with an indirect lender, checking out a dealer with a special finance department that works with subprime lenders could be for you.

Special Finance Departments and Bad Credit

There are some dealerships that have special finance departments that have lenders that are able to work with bad credit borrowers. They’re called subprime lenders, and they use income, overall stability, credit scores, and more to make loan decisions.

With a subprime lender, you first submit items that prove your ability to repay a car loan, they create a budget based on your information, then you select a vehicle from the dealer that fits within the lender’s guidelines.

Subprime lenders usually require a down payment as well, typically at least $1,000 or 10% of a car’s selling price.

With a subprime auto loan, if you qualify, you may be able to finance a certified pre-owned (CPO) vehicle. These are only available at franchised dealerships, and many are just coming off-lease. CPO cars typically are covered by a manufacturer’s warranty, and have lower mileage and less wear and tear than a regular used vehicle.

In-House Financing and No Credit Check

Along with subprime lenders, buy here pay here (BHPH) dealers also work with credit-challenged borrowers. These dealerships offer in-house financing, meaning the dealer is also the lender. You should be aware that these dealerships, unlike subprime lenders, only sell used vehicles.

BHPH dealers typically don’t consider your credit score when you apply for an auto loan. They’re more concerned with your ability to make the loan payments, so they check your income and require a down payment. A down payment requirement from a BHPH dealership could even be 20% or more of a car’s selling price.

While they don’t check credit scores, they normally don’t report loans to the credit reporting agencies. For a bad credit borrower, this means your credit score probably won’t improve by financing a vehicle from a BHPH dealer. But they can be a great resource for those who’ve been turned down by all other types of lenders, and for those who need a car immediately.

Choosing the Right Lender

Finding a lender that works best for your bad credit situation can be a hassle. After multiple rejections from traditional auto lenders, it’s easy to get discouraged. We get that – and we want to help.

At CarsDirect, we've teamed up with dealerships all over the country, including in-house financing dealers, that have special finance departments that work with subprime lenders. We connect bad credit borrowers to dealerships in their area for free. To get started, simply fill out our car loan request form.


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, Senior Auto Financing Editor

Beth is a content manager and writer for Auto Credit Express, CarsDirect, and other automotive blogs emphasizing financing and car loans for consumers with subprime credit. She is a graduate of the University of Michigan in Flint, with a bachelor’s degree in English writing.

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