You Should Apply for a Bad Credit Car Loan

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Even with poor credit.


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.

, - July 28, 2020

If you're thinking of applying for an auto loan but you know your credit isn't at its peak, you should apply for a bad credit car loan. These loans are most often provided by subprime lenders at special financing dealerships. Bad credit auto loans can help you improve your credit, and may afford you a chance at getting a better vehicle than you thought possible.

Getting a Bad Credit Car Loan

Getting a car loan when you have bad credit means meeting lender requirements for qualification. Don't let these steps dissuade you, lenders aren't setting out to make your life more difficult. Subprime lenders are actually looking beyond your credit score to get the whole picture of your financial life so they can make a more informed decision.

They do this by looking at your ability to take on an auto loan, whether or not you have a stable employment and living situation, and if you're willing to invest in your own success when it comes to a car loan.

These factors translate into steps you can take to prove your case for a lender:

  • Ability – Typically, getting a bad credit auto loan means having enough income to keep up with your monthly loan payment and full coverage car insurance, after having paid all your other bills for the month. At a minimum, lenders usually require income of $1,500 to $2,500 a month before taxes from a single source of W-2 income. Specifics vary by lender. You need to prove this with computer-generated check stubs showing year-to-date income. Additionally, you need to have 45% to 50% of your monthly income available after monthly recurring bills, including your auto loan and insurance payments. This is called your debt to income ratio, and it's one of the stipulations bad credit lenders generally require.
  • Stability – This gauges how likely you are to continue having the same income throughout your loan term, and that you're in a relatively set location. Stability allows lenders to make reasonable decisions toward extending you a car loan. You prove your residence by providing a recent utility bill or bank statement in your name for your current address. Some subprime lenders may require that you’ve been at your residence for at least one year, or at least in the same general area for the last three years. Additionally, you're typically asked for a list of personal references. This can be in case the lender needs to contact you and isn't able to through the information they have on file, or if they want to confirm other information in your application. Generally, you need to provide around five to eight complete personal references.
  • Willingness – It's been shown that borrowers who participate in their auto loans by making a down payment are more likely to successfully complete them. For bad credit borrowers, a down payment of at least $1,000 or 10% of a vehicle's selling price is typically required, though the amount can vary by lender.

Now that you know what a lender is looking for in order to approve you, let's look at how a bad credit car loan can benefit you.

Build Better Credit With an Auto Loan

Getting approved to finance a vehicle is only half the battle when it comes to a bad credit auto loan. Once you're approved, you have to keep up with your car loan payments, carry full coverage auto insurance, and make sure the vehicle stays in good shape while it's on the road. But all of this comes with a big perk: the improved credit score that comes from making your payments on time.

A car loan is a good way to get there because it impacts the factors that make up your FICO credit score in a big way. Typically, auto loans range from 48 to 96 months or more (four to eight years), which gives you a nice long stretch of time to make timely payments.

This is important because making payment history makes up the biggest hunk – 35% – of your FICO credit score. Making on-time payments on your accounts is the easiest way to build your credit score. But payment history isn't the only piece of your credit score puzzle a car loan affects.

Getting an auto loan also gives you a new installment loan, which can look good for both new credit and credit mix. Each of these factors makes up 10% of your credit score. Additionally, since you're paying off your loan for a number of years, you're only adding to the length of your credit history, which accounts for 15% of your credit score.

Credit building is a slow process, so don't expect to see drastic changes overnight. But applying for and getting a bad credit car loan might just give you the credit boost you need by the time you're ready for your next auto loan.

Alternative Options for Bad Credit Car Loans

If building credit isn't your concern right now, and you just need a vehicle fast, you may be thinking about getting your next car loan from a buy here pay here dealership. This is a valid option if you need a vehicle quickly. A BHPH dealer is also a lender, so everything is done in-house at one location, which streamlines the process.

Many BHPH dealerships have earned a reputation for not doing credit checks, which can make them a go-to for bad credit and no credit borrowers. However, not doing a credit check means you have to accept certain trade-offs to auto loan approval. Chief among these is a higher than average interest rate on many car loans, and having to provide a large down payment.

Another trade-off is the fact that an auto loan from a BHPH dealer may not improve your credit score like a bad credit car loan from a subprime lender. This is because BHPH dealerships may not report timely payments to the credit bureaus, and without this, there's nothing to tell them you're building payment history and your credit doesn't improve. It's important that ask about these things before you sign on the dotted line.

Additionally, BHPH lots only sell used vehicles. This means that you're likely to have a very different selection of cars than you may find at a special finance dealer.

While a loan from a BHPH dealership is usually always an option, you should reserve them as a second-chance financing option if you can, and apply for a bad credit auto loan through a subprime lender instead.

Get Your Next Auto Loan

Getting a bad credit car loan definitely has its perks, and we want to help you reap those benefits and save you a little stress, too. Here at CarsDirect, we're connected with a nationwide network of special finance dealerships that work with subprime lenders.

Getting started is simple! Just fill out our free auto loan request form, and we'll get to work matching you with a dealer in your area!

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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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