What’s a High Risk Auto Loan?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - December 19, 2018

A high-risk auto loan, also called a second-chance or bad credit car loan, is an auto loan meant for consumers dealing with various credit challenges such as no credit, bad credit, and even bankruptcy. These car loans are considered to be a greater risk for the lenders who issue them, not the consumers applying for them. Traditional lenders don’t offer high-risk auto loans, and it can be difficult finding a special finance dealership that has the lending sources that offer second-chance car loans.

High-Risk Auto Loan Qualifications

Because second-chance auto loans are designed for credit-challenged car buyers, special finance lenders look past your credit profile to determine approval. Although they still check your credit score and view your credit reports, high-risk lenders generally examine four additional factors to approve buyers for auto loans:

  1. Basic qualifications – While subprime lenders work with borrowers with bad credit or even no credit history, you must be 18 years old, a current legal resident of the US, and have a valid driver’s license to apply for a car loan.
  2. Income and employmentThe biggest factor that determines approval when you’re dealing with special financing is your income situation. Generally, lenders like to see a minimum income of $1,500 to $2,000 a month before taxes from a single source. You also need to bring in a recent pay stub or tax returns (if you’re not a W-2 employee) to prove your income and employment information.
  3. Debt to income and payment to income – The next thing lenders look at is your debt to income (DTI) and payment to income (PTI) ratios. Your DTI ratio determines the monthly payment you can afford, and is calculated by adding up all your monthly bills and dividing it by your pre-tax monthly income. Your DTI should be below 45 to 50 percent, including the loan and insurance payment, if you want to get approved for a car loan. Your PTI ratio, on the other hand, determines the percentage of your monthly income that can be used toward an auto loan. To calculate your PTI, add up the estimated car and insurance payment and divide it by your pre-tax monthly income. Your PTI shouldn’t exceed 15 to 20 percent of your monthly income.
  4. Down paymentA down payment is required when getting a high-risk auto loan. The amount required varies by lender, but subprime lenders generally ask for a minimum of $1,000 or 10 percent of the vehicle’s selling price, whichever is less. Buy here pay here lenders who offer in-house financing may ask for more, but this depends on the type of car you finance.

Types of Second-Chance Auto Loans

Did you know there’s more than one type of second-chance car loan? You don’t have to visit a special finance dealer, you also have the option to work with a dealership that does the lending, too.

The first type of loan is getting financed through a special finance dealer that’s signed up with one or more subprime lenders. It’s similar to the traditional finance process, where you go to a dealership and work out the financing specifics with a finance manager. These lenders check your credit, but, by taking out a subprime auto loan, you can improve your credit over time as long as you keep making on-time payments.

The second loan type is getting financed by a dealer that lends in-house. Also known as buy here pay here lots, the in-house financing dealerships are also the lenders and typically aren’t signed up with any third-party lenders. These dealers don’t run credit checks and usually don’t report loans or on-time payments to the credit bureaus. Getting a car loan through a BHPH dealership is great if you need of a vehicle fast, but if fixing your credit is on your to-do list, don’t expect this type of loan to help you in that department.

Let Us Find a Second-Chance Auto Loan for You!

At CarsDirect, we do the searching for you. We know how difficult it can be to find a lender that offers second-chance auto loans. Let us help you get connected to a dealer in your area that can get you the financing you need. Our service is free, and there’s never any obligation to buy anything. Get started today by filling out our car loan request form!

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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