When you have a low credit score, it can be hard to imagine that you have some of the same lending options as a borrower with better credit. You don't have to use your imagination, though, because it's true! You can still get a car loan with low credit – if you know where to go.
Credit Scores Matter in Car Loans
When you finance a vehicle, credit score matters because, traditionally, it's the first thing any lender looks at to determine your creditworthiness. There’s a type of auto lender that knows credit score is just a jumping-off point, though – subprime lenders.
These lenders dig a little deeper than the three digits that make up your credit score. Before we dive into subprime lenders and how they can help, let's look at what credit scores are, what makes them good or bad, and how you can find yours if you don't know where to start.
Your credit score is a three-digit number that can range from 300 to 850 on the FICO credit scoring model, which is the most widely used by lenders. The higher your credit score, the more lending opportunities, and better deals, you may qualify for.
What Makes a Credit Score "Good" or "Bad"?
Credit scores are divided into tiers. Each tier contains a range of credit scores, and generally categorizes you into an easy grouping for lenders who use your credit score to determine loan eligibility.
According to Experian, one of the major U.S. credit bureaus, these categories are: deep subprime (300-500), subprime (501-600), nonprime (601-660), prime (661-780), and super prime (781-850). Typically, anyone with a score of 660 and below may be considered to have a low credit score, and may have better luck financing a car with a subprime lender.
Wondering how your credit score is tallied? Your credit score is based on the information found in your credit reports. Credit reports are records of your financial situation and credit accounts both past and present. There are five categories in your credit report that each carry a certain weight. Combined, these factors determine your credit score.
New to Credit and Not Sure Where to Start?
If this all sounds Greek to you, don't fret. Getting a handle on your credit score and reports can take some time. Fortunately, you can start by visiting www.annualcreditreport.com. This government-run website gives you the power to find out what your reports are saying for free, for free.
Due to the coronavirus pandemic, you can now check your credit reports and score once a week free of charge, until April 2021. After that time, you're only allowed to view a free report from each credit bureau for free once every 12 months (which was the pre-pandemic standard).
Lenders for Good Credit Scores
Now that you can see how credit score factors into a car loan, you can look at the differences between traditional direct lenders and subprime lenders. Traditional lenders, or direct lenders, are lenders you can get a loan from directly, such as a bank, your credit union, or an online lender.
If you're seeking pre-approval, this is typically the type of lender you'd go to. However, they generally reserve their auto loans for borrowers with good credit scores. If you have a low credit score and want to go for this type of loan, you may have better luck with a credit union if you're a member in good standing, but a car loan approval is never a guarantee.
Low Credit Scores OK for Subprime Lenders
However, as a bad credit borrower, you're likely to have even better luck if you find a subprime lender to work with. These lenders still look at your credit score, but they dig a little deeper to find out why your credit score is low.
There are several situations that may be out of your control which have brought your credit score down, or maybe you're just new to credit and have a thin file. These things aren't an issue for most subprime lenders. To make sure that you're a good candidate for an auto loan, subprime lenders require that you meet a number of qualifications.
These are what help them consider you even if you have a lower credit score. Specific requirements vary by lender, but most subprime lenders ask that you provide: proof of income, residency, and a working telephone, along with a valid driver's license, personal references, and a down payment. You can learn more about these common requirements for a subprime auto loan here.
When subprime lenders look at the documentation you provide, it helps them determine your ability, stability, and willingness to take on a car loan. As with direct loans though, not everyone is qualified to take on an auto loan from a subprime lender.
Even if you're facing a denial from a subprime lender, your luck may not have run out yet; there's still one more option for a car loan when you have low credit.
Financing With an In-House Auto Loan
If you're turned down by a subprime lender, you may still be able to get financing for your next vehicle through a buy here pay here (BHPH) dealer. These car lots only offer used vehicles, but if you need a car quickly, they could be just the thing for you.
BHPH are reputed to not rely on your credit scores, and many don't check your credit in order to give you an approval. However, this leads no credit check lenders to judge your creditworthiness in another way. This means they typically charge higher interest rates and require larger down payments than a subprime lender.
Ready to Look for Your Next Car Loan?
If you want to skip the hassle of searching for an auto loan, we want to help. Here at Drivers Lane, we know that going for a subprime loan is a good option for borrowers with low credit. When you're ready to find a dealership, we can help prepare you with expert guidance and tips on all things bad credit car buying.
We can also save you the stress of determining which local dealers are signed up with subprime lenders (not all dealerships are). For an easy, straightforward path to your next low credit car loan, just fill out our fast and free auto loan request form. We'll match you to a dealer in your area that knows how to help! There's never any obligation to buy, so get started right now!