Bad credit can get in the way of many things, including a car loan. But, bad credit doesn’t put you out so much that it is a game-changer.
Bad credit and you
If you have a bad credit score, it is a score below 670 on the FICO credit score model. FICO scores range from 300 to 850. The higher your score, the better. However, your credit score is not just an arbitrary number. This is what you get when you add the sum of the parts that make up your score. These parts are the payment history, 35%; amounts due, 30%; length of credit history, 15%; 10% credit mix and 10% new credit.
As you can see, payment history has the biggest impact on your score, which means that a lower credit score can be a red flag to lenders about how well you’ve paid off loans in the past. the past.
Impacts of Bad Credit on Auto Loans
Bad credit often means needing more proof than you can repay a loan than a good borrower may have to provide. This is not a hindrance for you, but rather a help, so that the lender can see your real situation. The lender doesn’t want you to default on your loan, it’s not good for anyone involved – you lose a car and damage your credit, the lender and the dealership lose their profit.
To ensure that a borrower with bad credit can handle a car loan, subprime lenders often require:
More documentation: Borrowers with a credit score of around 670 or less may need a special financing dealership with subprime auto lenders who require proof of income, employment, residence, and a working phone in your name. ; they also typically require five to eight personal references.
Longer loan terms: The faster you pay off a loan, the less interest you pay. However, getting those short loan terms means paying more each month, and that may not be an option when you have credit problems. Many lenders do not offer short-term loans – 12, 24, or 36 months – to borrowers with a lower credit rating.
A higher interest rate: Your credit score is the most important factor in determining your interest rate, and the lower your score, the higher your rate tends to be. Your interest rate is your cost to borrow money, so the higher your rate, the more you pay back.
A co-signer or co-borrower: In some cases, a lender may offer you a loan as long as you get a co-signer or co-borrower. Although these seem similar, they play very different roles in a car loan. A co-signer lends you their good credit rating to help you qualify for a loan if yours isn’t quite up to par. A co-borrower, however, gives you a helping hand with finances, combining your finances to qualify for a loan. Co-borrowers can only be a spouse or life partner since you cannot accumulate your income with just anyone!
Less car options: Often times, the cost of a new car is prohibitive for a borrower with bad credit, meaning they have to choose from a selection of used vehicles. Cars today last longer and need less maintenance than just a few years ago. Plus, when you buy a vehicle as a borrower with bad credit, you don’t have to choose your car first. You must first obtain financing and then choose a vehicle that matches your approved loan amount.
Down payment requirement: when you have poor credit, it is common practice for lenders to require a down payment. Typically, they require at least $ 1,000 or 10% of your vehicle’s selling price, often the lesser of the two. However, down payment requirements vary depending on the lender and your situation.
Debt to Income Requirements: Debt to Income (DTI) is a ratio used by lenders to determine how much of a car loan you can take out. It measures your monthly pre-tax income against your monthly payment obligations for loans, leases, and lines of credit. To find it, add up your payments including an estimated car loan payment. Divide by your gross monthly income. Your answer is how much of your income is already used. For example, if your monthly payments are $ 1,200 and your pre-tax income is $ 2,771, you are already using about 43% of your income. Most lenders don’t allow bad credit borrowers to take on debt they can’t comfortably afford, capping your DTI at 45% to 50% of your income.
Repair your bad credit
Bad credit can impact your car loan odds, but once you get one from a subprime lender, a bad credit car loan can be one of the best ways to improve your score. credit. A car loan reaches many different parameters that increase your scores, such as payment history, new credit, and credit mix. Of course, you need to make all of your payments on time and in full, and not let your other bills slip away if you hope to increase your credit score.
A car loan is a great way to improve your credit, but it’s only one way. You can also become an authorized user on someone’s credit card, clean up your credit reports, and pay off unpaid debts as well. Plus, you can make your current payments work for you by using a service like Experian Boost to get credit for things you’re already paying for.
Ready to start?
If you’re ready to find your next car loan, we want to help. TO Auto Express Credit we’ve worked hard to bring together a nationwide network of Special Finance dealerships who are signed up with the lenders you need. To connect to one today by filling out our auto loan application form, it’s quick, free and without obligation.