When you need a car loan, you should know that you may have options even if your credit is suffering. There are two types of lenders, direct and indirect, and although they both offer auto loans, the way you apply is different for each.
Indirect vs. Direct Auto Loans
Indirect and direct auto lenders both offer car loans to buyers. Whether or not you choose to get an indirect or direct auto loan is typically up to you, but it can depend on your credit. Let’s take a look at the differences between the two:
- Direct financing is when you apply for a car loan directly from a financial institution such as a bank or credit union. Direct financing is great if you have a relationship with either one, or if you have good to excellent credit, as these lenders may be able to pre-approve you for an auto loan. Getting a pre-approval from a direct lender is also a great way to rate shop, as you can easily check if other lenders can offer you better terms than what you've already been approved for.
- Indirect financing is when you apply for a car loan through a dealer. With indirect lending, you visit the dealership, pick out a vehicle, and apply an auto loan through the financing sources the dealer works with. Examples of indirect lenders include Volkswagen Credit and GM Financial, who are also captive lenders of their respective brands.
How to Get Financing with Bad Credit
Getting a car loan from most captive lender can also be a problem because, like banks and credit unions, they also place a heavy emphasis on your credit score. Depending on the vehicle you want to finance and where your credit score falls, these lenders may ask for additional documentation, such as proof of income. If you attempt to get financing – either directly or indirectly – and are denied because of your credit score, you need to look for another type of indirect lender.
In this case, the next best option is a subprime lender, who loans indirectly through a special finance dealership. These lenders specialize in approving credit-challenged car buyers for financing. Instead of just looking at your credit score, they consider other factors, which include:
- Your ability to pay a loan – Your income and work history
- Your residence stability – How long you’ve lived in the same area
- Your willingness to pay a loan – How you’ve paid your bills in the past
With a subprime auto loan, you can get a vehicle and the chance to build or rebuild your credit at the same time. With regular on-time payments, you could qualify to finance your next car at a better interest rate if you improve your credit score.
Another option is to visit a buy here pay here dealer. These dealerships are also the lenders, and offer in-house financing. Typically, these dealers don’t run credit checks or report loans or on-time payments to the credit bureaus. But they do report any missed payments, so you typically can’t improve your credit score but can make it worse by taking out one of these auto loans. If you need a vehicle as soon as possible, a buy here pay here lot may work for you.
Need Help Finding Financing?
At Drivers Lane, we work with dealerships all across the US that have lenders equipped to work with people who struggle with credit issues. You might be surprised by what our network of special finance dealers and their lenders can do for you. Simply fill out our car loan request form today, and we'll get to work matching you with a local dealership.