Yes, bad credit can affect your car loan. But bad credit isn't a one size fits all issue. Because your credit score is one of the key factors lenders use to determine if you qualify for financing, it can impact not only the loan, but where you're able to apply for one.
Knowing Which Lenders to Work With
Just like there are different bad credit situations, there are different types of auto lenders, too. Not all lenders work with people with credit issues, so it's important that you get a lender that's prepared to work with your type of credit.
Traditional lenders – like banks, credit unions, and captive lenders like Ford Credit – base their loan approvals solely on credit scores. Because lending can be a risk, these lenders tend to service people who have good to excellent credit. These good credit borrowers, who typically have credit scores of 700 and above, are looked upon as less risky by these lenders. If you're struggling with credit issues, it's not always impossible to get a loan from a traditional lender, especially if you're a longtime member of a bank or credit union and in good standing, but it's usually difficult to even meet their qualifications.
Subprime lenders, on the other hand, know that many people with imperfect credit also need auto financing. For this reason, they use factors beyond credit to help get you approved for financing. Another thing that differs between some traditional lenders and subprime lenders is the fact that you can't sit down with a subprime lender face to face. They typically only work through special finance dealerships, so it's important that you go to the right dealers when you need a bad credit car loan.
A Closer Look at Bad Credit
Subprime lenders know that there are two types of bad credit:
- Situational bad credit – Often a result of unforeseen changes such as hospitalization or unexpected job loss that leads to a negative effect on your credit. In these cases, lenders can see that your credit was doing well until whatever bump in the road happened. If this describes you, you may still be eligible for decent rates and terms when you work with the right lender.
- Habitual bad credit – Bad credit as a result of a history of regular late and/or missed payments. People with habitual bad credit are also more likely to have a bankruptcy or repossession as a factor that's dropped their credit score. This type of bad credit is generally plain to see when a lender looks at your credit score and reports. The good news is that with time and effort, this can also be turned around.
Proving You're Ready for a Bad Credit Car Loan
Subprime lenders know that an auto loan can be a good way to begin improving your credit. For this reason, they use factors such as income, employment, residence history, and a down payment to make sure you have the ability, stability, and willingness to successfully complete a car loan.
In order to show this to a lender, you typically need to bring in documents that prove you are who you say you are and you make what you say you make. Typically, subprime lenders require:
- Proof of identity – A valid driver's license or state ID, depending on the lender and state requirements.
- Proof of income – A recent computer-generated check stub showing year-to-date income of at least $1,500 to $2,000 a month before taxes.
- Proof of residency – A current utility bill in your name with the address listed on your auto loan application.
- Proof of a working phone – A landline or contract cell phone in your name at your address; no prepaid phones allowed.
- Down payment – Needed amount varies by lender, but it’s usually $1,000 or 10 percent of the vehicle's selling price, whichever is less.
Finding a Dealer that Can Help
Now that you know how bad credit affects applying for a car loan, and that they're not out of reach if you use the right type of lender, you need to know how to find these lenders. Don't drive all over town trying to find a dealership that works with them. Instead, let Drivers Lane be your guide. We work with a nationwide network of special finance dealers that have the lending resources you need. Simply fill out our easy auto loan request form, and we'll get the process of finding a dealership in your area started right now!