A subprime lender offers loans to many people who have bad credit. When your credit isn’t good, it's important that you work with the right kind of lender when you need a car loan. This typically means applying with a subprime lender at a special finance dealership. But what, exactly, is a subprime auto lender? Let's take a look.
Traditional Lenders vs. Subprime Lenders
When you have good credit, you should be able to qualify for a traditional loan. Good credit also gives you more options to choose from. For instance, you shouldn't have a problem going to any bank or credit union for a direct loan, and you could likely walk into any dealer and get approved. These are examples of traditional loans.
It's more difficult to qualify for a car loan with traditional lenders if you have bad credit because they rely too heavily on credit scores. The lower your score, the worse your chances of getting an approval are. This is where subprime auto lenders come in.
They specialize in car loans for people with bad credit, no credit, and other unique credit situations. A subprime lender looks your beyond credit score to help to qualify you based on additional factors such as income and residence stability.
These lenders work exclusively through special finance dealerships, which means you can't sit down face to face with them. Instead, they work as a third party, and the finance manager at the dealership is the middleman.
Who Qualifies for a Subprime Loan?
Generally, if you've been turned down for a loan through a traditional lender, you can always try for a loan from a subprime lender. Because of this, they're sometimes referred to as second chance loans. Instead of needing a second chance loan, there are other indications you might know you need a subprime loan.
One way, which we've already mentioned, is having bad credit. Bad credit is typically classified as a FICO credit score below 660 to 600. If you're unsure of your credit score, there are plenty of ways you can find it out for free, such as through your bank or credit card company. Or, you can sign up for a service that allows you to monitor your credit reports and score.
Others who may qualify for subprime auto loans are those without any credit at all, a group that includes young people, recent graduates, and consumers who've always used cash. Having a thin credit file can often be just as challenging as having bad credit because traditional lenders like to see a pattern of responsible credit use.
Without any credit history for them to look at, they often turn borrowers down for financing. However, that's not the case with a subprime lender. With subprime lenders, they're more likely to ask for a cosigner if they feel your credit history is too thin.
Requirements for Subprime Lending
In order to provide loans for people who have bad credit or no credit, subprime lenders look at other things to determine if you have the ability, stability, and willingness to pay on a car loan.
To see that you’re able to take on a loan, lenders look to your income and employment. Though the specifics vary by lender, you're typically asked to provide a recent computer-generated check stub showing a minimum income of $1,500 to $2,000 a month before taxes.
For proof of residence, lenders ask you to provide a current utility bill and phone bill in your name at the address listed on your application. To learn more about stability, they ask about how long you’ve lived there and in the area. You also typically need to provide a list of five to eight personal references complete with names, addresses, and phone numbers.
Lastly, subprime lenders like to see that you're willing to invest in your own success. Generally, lenders believe that people who make a down payment on an auto loan are more likely to complete it successfully. Therefore, most subprime lenders require borrowers to have a down payment of at least 10% of the vehicle’s selling price or $1,000, whichever is less.
Finding a Subprime Auto Lender
Now that you know what a subprime lender is, and what it takes to get approved through one, how do you go about finding them? As we've said, you need to find a dealer that already has a relationship with these lenders, and we can help you find one near you.
Drivers Lane works with a nationwide network of special finance dealers that have the lending resources you're looking for. We can match you to a local dealership with ease. Just fill out our free, no-obligation car loan request form, and we'll get to work connecting you with a dealer in your area!