Can bad credit prevent me from getting a car loan?
Depending on the lender you apply to, yes, bad credit can prevent you from getting a car loan. However, if you apply to lenders who specialize in assisting borrowers with challenged credit, your credit score is only part of the larger equation.
Why bad credit can be a hindrance
Your credit reports and scores are often the cornerstone of being approved for new credit, such as a car loan. Your credit score serves as an instant summary of your credit reports, so a higher credit score generally means you have good credit.
Creditworthiness roughly translates to how willing a lender is to believe you can repay the car loan. Credit scores are usually a big part of your creditworthiness, and other major players tend to include your income and down payment amount.
In some cases, even if you have enough income to prove you can afford the car loan, a bad credit score could be enough to get you turned down. However, there are subprime auto lenders that help borrowers with bad credit, and they use a lot of other things to determine your creditworthiness.
How Subprime Lenders Determine Creditworthiness
Subprime lenders are third party lenders who are registered with special financial dealers. To determine your eligibility for auto financing, they look at the many determinants of your financial stability.
For a subprime lender, the most important factor in your creditworthiness is your overall stability. This means having a stable income, job, living situation and being able to provide a down payment. Down payments increase your chances of completing the car loan and show the lender that you are able to save for major purchases, which bodes well for your creditworthiness.
Subprime auto loans can also improve your creditworthiness because they are reported to credit bureaus. If you handle the loan well, your on-time payments improve your credit score, which, together with a completed car loan, provides you with more credit opportunities in the future.
Bad Credit Car Loan Requirements
We’ve put together a list of common subprime auto lender requirements to prepare for when you’re ready to apply for financing. Keep in mind that each lender varies in their specific requirements, but this is a good place to start!
Common subprime financing requirements include:
- Income and work history – Since you need income to pay off the car loan, subprime lenders usually require between $1,500 and $2,500 minimum monthly income (before taxes). They also generally need a consistent work history. Most of the time, you need at least a year with your current employer and about three years of work history with no gap between jobs of more than 30 days.
- Stability of life and residence – Many subprime lenders require you to have lived at the same address for about a year. The longer you live in the same residence, the better your chances of qualifying for a car loan.
- Debt-to-income (DTI) and payment-to-income (PTI) ratios – Your DTI ratio has to do with how much income you have left after paying your bills and scheduled car loan and insurance payments. Your PTI ratio is your income compared to monthly payment and car insurance. Lenders use these ratios to ensure that you are not going to stretch your finances too much with the car loan by ensuring that you are not currently overstretched.
- Your credit score – Your credit score is the most important factor in determining your interest rate if you qualify for financing.
- Deposit – Subprime lenders generally require a down payment of at least $1,000 or 10% of the sale price of the vehicle. Providing a down payment is a requirement for almost all bad credit auto loans.
- Personal references – If you qualify for financing, expect the subprime lender to ask you for a list of about five to eight references with full contact information. The only stipulation with this requirement is that your references cannot live with you.
- Functional telephone – Your lender may need to contact you, so they will ask for proof that you have a landline or contracted mobile phone. Proven with a recent telephone bill in your name; prepaid phones do not meet this requirement.
- Valid driver’s license – Used to verify your identity and allow you to drive the car off the lot. The license cannot be revoked, suspended or expired, and it must show your current address.
Knowing what a subprime lender is likely to expect from you can be one of the trickiest parts of financing, and requirements are always likely to vary depending on where you’re applying. The stipulations that we list are often the references of subprime auto loans. So you can go to a financing broker with some information behind you to avoid being blindsided by the requirements.
Find a Special Finance car dealership
Now you know that bad credit doesn’t have to be the reason you can’t get a car loan because there are lenders out there ready to help, but where are those subprime lenders? Well, we can help you too.
Here has Auto Express Credit, we have cultivated a network of dealers who help borrowers with bad credit and we want to find one in your area. To get in touch with a dealership that offers bad credit loan options, complete our auto loan application form. It’s secure, non-binding and completely free – so get started now!