What is a high-risk car loan?

You may have heard people refer to certain auto loans as high-risk auto loans. High-risk auto loans may get a bad rap, but there’s nothing wrong with an auto loan that can boost your credit score while getting you the vehicle you need, as long as you play it smart.

High Risk Auto Loans

High risk car loans, sometimes called bad credit car loans or second chance car loans, are loans for consumers who have bad, little or no credit. These borrowers may have other negative ratings on their credit reports that could result in auto loan denials from traditional lenders.

This is where bad credit car lenders, called subprime lenders, come in. These lenders do not offer bad credit auto loans based solely on credit score. They look at additional factors that can help you get the loan you need.

Although collecting additional documents to prove that you can meet the lender’s requirements may seem like a burden, you can consider it a trade-off for the desirability of a car loan.

Compromise of requirements on risks

To get a car loan through a subprime lender, you need to meet a few conditions that show you have the will, the ability, and the stability to take it on. Since there are certain risks associated with getting a car loan with bad credit, not only for the lender but also for you, meeting the lender’s requirements can give you peace of mind.

Here are four things you need to be sure of before taking out a high-risk car loan:

1. Can you comfortably repay the loan?

Lenders don’t want you to go bankrupt just to buy a vehicle. That’s one of the reasons they have a minimum income requirement, so you aren’t stretched too hard when it comes to making payments. Although it may vary, most subprime lenders have a minimum monthly income requirement of around $1,500 to $2,500 before taxes from a single source. You are usually asked to prove this with your most recent computer-generated pay stub showing your year-to-date earnings.

Another repayment factor is whether your current bills already represent the bulk of your income. If half of your monthly income is already used to pay car loans and bills, you may have trouble meeting the requirements. Subprime lenders use two calculations to see your budget flexibility, and so do you. You can learn more about debt-to-income and payment-to-income ratios here.

2. Do you have stability?

Having enough stability to offset the risks of a bad credit car loan means having both residency and job stability.

Residential stability means having a place where you reside on a regular and consistent basis. Many subprime lenders require you to have lived in your current residence for one year or in the same area for three years. If you can’t prove the stability of your residence, a lender isn’t as willing to give you a car loan because they may not be sure you know where you might be from a week to the other.

Stability of employment and income shows a lender that you have had and will, with reasonable certainty, have stable employment. For most subprime lenders, this means having been in the same job for about six months to a year, as well as having at least three years of continuous work experience. Standard W-2 employment is preferred in most cases, but other forms of income, such as self-employment, may be acceptable.

3. Can you pay a deposit?

Making a down payment has many advantages when it comes to getting a car loan. This shows the lender that you have skin in the game, which means you are ready to invest your own money in your chance of getting a car loan. Many subprime lenders require a down payment of at least $1,000 or 10% of a vehicle’s sale price.

Plus, a down payment means borrowing less. This can help you save money in interest charges down the road, reduce the time you’re likely to spend with negative equity, and potentially qualify for better rates and terms than you would with a smaller down payment, or none at all.

4. What do your credit reports look like?

The information in your credit reports helps lenders draw conclusions about how you’ve handled credit in the past. It’s also important that you know what’s on your credit reports and how it affects your ability to get a car loan.

Your credit reports contain information about your payment history, the amount of your credit card debt, and how often you apply for new credit. They also contain information about bankruptcies and car repossessions that can lower your credit score and show lenders that you’ve had trouble in the past.

On top of that, if you don’t know your own credit score, you are giving up your bargaining power. Even though a subprime lender uses other factors to determine your eligibility for a car loan, knowing where your credit score stands can help you research things like the average interest rate someone in your situation may qualify for. .

Play smart in a car loan

If you’ve had credit issues in the past and you’re ready to take out a subprime auto loan and repair your credit, then you need to play smart. That means getting a car loan you can comfortably afford each month, preparing a large down payment, and choosing loan terms that benefit you in the long run.

By having a large down payment, you can avoid putting yourself in a negative equity position and reduce your overall cost. High risk auto loans tend to have higher interest rates, but there’s less interest to pay if you finance less by lowering the price of the vehicle with a down payment.

You should also consider taking out a loan with a term of five years or less. Borrowers who choose long-term loans usually do so to lower their monthly payment, but for high-risk loans, that could mean paying thousands in additional interest charges. Pick a loan term that you can comfortably afford, but not one that means paying a lot more for the car than it’s worth.

When you take steps to ensure a successful bad credit auto loan, you can rest assured that you are doing what needs to be done to get the vehicle you need. But that’s not the only good thing that comes from a high-risk car loan. They can also start your lending institution.

Get better credit with a car loan

A car loan is an excellent source of credit repair. It can build your payment history for a long time because loans are usually long deals. Getting new credit by getting a car loan also helps. But you can only get the benefits of an auto loan if you qualify, so it’s important to work with the right lenders from the start.

Here has Auto Express Credit, we can help you find these lenders without having to search all over town in person. You can start the process of your next car loan with ease by filling out our fast, free and no obligation car loan application form.

Once you’ve taken the first step, we’ll find a financing dealership in your area that has the prime lenders you need to get your credit back on track with the vehicle you need!

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