Bad Credit Auto Loan Approval Guide
Buying a car can be a very frustrating experience; it can be even more frustrating if you're trying to get a car loan with a bad credit problem. Bad credit is not prejudice or bias, it can happen to anyone at anytime.
Purposely not paying back loans is not the only way to acquire a bad credit history. Get divorced, lose a job or get injured for a long period of time can also throw you into a bad credit rating very quickly...If you want to be there or not.
Having bad credit doesn't mean you're a bad person or you deserve to drive an unreliable vehicle. There are many companies out there that understand the situation you're in and want to help you find a vehicle you want and will also help you get it.
This section will show you how to find lenders that will provide car loans for people with bad credit and how you can increase your chances of being approved and what to expect after you've been approved for a car loan.
Bad credit topics in this section:
- How to get free, no-obligation bad credit auto loan quotes online.
- What is "Special Finance" or "Sub-Prime" lending?
- Credit ratings a sub-prime borrower may have.
- What to expect if you have a bad credit history.
- How to increase your chances of being approved.
- How to get out of a high interest auto loan.
- Why you should get pre-approved first.
- Finance the minimum amount possible.
Errors on your credit report will cause you to have a bad credit score, if you're unaware of what's been reported to your credit report, read my section on how to get your credit report online. If you do find errors on your credit report, cleaning them up will increase your credit score.
If you have a bad credit history or rating, you have nothing to be ashamed of. There are millions of people in the world today with credit problems and with the way the economy is, the number is rising on a daily basis.
It may take a little time but you can always turn a bad credit rating into a healthy strong history. However if the one thing you lack is time, there are several lenders out there willing to help you know matter how bad your credit rating is.
What is "Special Finance" or "Sub-Prime" lending?
In the finance world, sub-prime lending also known as "special finance," "non-prime," "near-prime" and "second-chance financing" means to give loans to individuals who may have difficulty in maintaining the repayment schedule of the requested loans.
Sub-prime loans are characterized by less favorable terms and higher interest rates in order to compensate for the borrowers higher credit risk. Although these types of bad credit auto loans may possibly be more expensive, they will allow someone with a bad credit rating and score to obtain a car loan and be on their way to re-establishing an excellent credit history.
Car Buying Tip - Never let a finance manager or car salesman talk you into something you know you can't afford. They don't care if you can make the payments or not as long as they can make a commission from the sale. If you know you cannot comfortably afford the monthly car loan payments, don't buy the car!
Credit ratings a sub-prime borrower may have:
- Excessive debt to income: The individuals known income is not enough to pay current responsibilities, living expenses, interest, and repayments of the money borrowed.
- A proven history of missed or late payments over a period of time.
- Limited experience with debt, no track record to determine if the borrower will repay a loan. The lender automatically assumes the worse.
- Defaulted debt, failure to pay debts completely, charge-offs, not fulfilling the borrowers responsibility to pay back the debt.
- Bankruptcy, foreclosure, legal judgments (orders to pay), unpaid child support, etc.
What to Expect if You Have Bad Credit
Having bad credit does not necessarily mean you will not be approved for a car loan. You may have to take a step back when financing your next vehicle. The goal is to do it right and as quickly and as financially painless as possible.
You can fix your past bad credit history, it just takes time. Until then you may have to fulfill certain requirements you wouldn't have to if you had good credit history.
Obstacles you may have to overcome:
- You may have to provide a larger down payment.
- May have to pay a much higher interest rate than posted in a car dealer's advertising.
- May only qualify for shorter finance terms.
- You may only qualify to borrow only a certain amount of money.
- You may not qualify for the exact car you want to buy or the dealership your applying with will only have a small selection of cars for you to choose from depending on your approval qualification.
- You may have to supply extra documentation such as proof of income (computer generated pay check stub with your name), proof of residence (phone bill, credit card statement or utility bill with your name and current address), employment and personal references.
How to Increase Your Chances of Approval
When applying for a bad credit auto loan, the lender will look for certain minimum requirements before making a decision on approving an applicant. You don't have to meet all of these requirements but the more of these you do meet before applying, the better chance you will have on being approved for a bad credit auto loan.
Tips to help increase your chances of approval:
- Have at least a $1,600.00 gross monthly income. (Some lenders only require only $1,500.00) This is your monthly income before any taxes are deducted.
- Must at least be 18 years of age. By law a lender cannot enter into a contract with a minor.
- May not have any repossession within the past year unless they were included in a bankruptcy.
- Proof of residence. Living at your current residence for at least 6 months to a year. The longer you've lived at your current residence, the better chances of getting approved for a car loan. The lender may want a utility bill or phone bill with your name and address on it for proof. The old saying in the car business is, "No phone - No Loan!"
- Proof of employment. Working at your current job for at least 6 months to a year. The longer you've worked at your current employer the better; working in the same industry may work also. This also shows the lender you're stable.
- Keep your budgeted car payment under 20% of your total gross monthly income.
- A lender may require up to 7 personal references with addresses and phone numbers. Have these ready so you won't have to scramble to get them later in the process.
- Depending on how bad your past credit history is, you may or may not be required to put down 10% or more of the purchase price of the vehicle you want to finance.
- Get and review your credit report and score. I recommend using an online company such as MyFreeScoreNow to get your credit report and score. Once you receive your reports, fix any errors and/or any critical mistakes. You should always know what's been reported to your credit bureau and maintain any issues that may arise as soon as possible to keep your credit history clean and healthy.
- Pay down credit card and other loan balances. This will not only decrease your debt to income ratio but will also raise your credit score.
How to Get Out of a High Interest Auto Loan
I get a lot of email from individuals telling me that a dealer ripped them off by signing them to a much higher interest rate than what they qualified for. If you find out a dealership took advantage of you there is something you can do about it and that's to apply for an auto refinance loan.
My online auto refinance guide has saved readers thousands of dollars in high interest charges. It only takes a couple minutes to see how much money you can save by lowing your current car payment.
Arrange Financing Before Picking Out a Car
Spending time to research, select and negotiate the purchase price of a vehicle only to find out you can't qualify for financing on the vehicle is a horrible feeling. Most people that have bad credit go about the car buying process backwards. You can save yourself a lot of time and frustration by applying for a bad credit auto loan before selecting a vehicle.
CAUTION - If you solely rely on a car dealer to arrange financing on your next new or used vehicle. You're guaranteed to lose money!
If you're aware you have some bumps in your credit history or you've never financed a vehicle before. It is best to apply for an auto loan first. Once approved, you'll know up front the amount of money you can borrow and the terms and conditions of the loan. Once you know this information you can find a vehicle that fits within the criteria of your pre-approved car loan.
Get Bad Credit Car Loan Quotes Online
All because you have bad credit or you don't have any credit history at all doesn't mean you don't have any options when it comes to finding a bad credit car loan with a decent interest rate.
Online auto finance companies such as myAutoloan, InstantCarLoan, and 1-800-FreshStart have huge auto lending networks to help people find a bad credit car loan and the interest rates are normally pretty good.
These online companies allow you to submit your information securely and will supply you with free, no-obligation bad credit car loan quotes. Even if you don't go with one of these online companies, they will give you an idea of the interest rate and amount of money you qualify to borrow.
Recommended Bad Credit Auto Loan Sites
MyAutoloan has one easy secure loan application and you will have up to 4 free loan offers competing for your business in minutes.
InstantCarLoan has been providing safe and trusted auto loans for over 10 years. They'll find you a fantastic deal on your next car loan.
1-800FreshStart has been in business for over a decade. They can help drivers that have bad credit, no credit, and even bankruptcies online instantly.
You can take the information you receive from the companies above and make a decision on whether or not you really need to buy a car at this time or if you need to keep your current car for a couple more months, save up a down payment and clean up your credit history. You will be surprised how much you can accomplish in a couple months.
Finance the Minimum Amount Possible
Once approved for a bad credit auto finance loan, don't get over-excited and start running up the balance. Adding extended warranties and over-priced dealer added options is not helping your situation.
You can get extended auto warranties online, direct from the source. A car dealer will mark up a $600 warranty well over $2000. You don't have to pay the ridiculous prices car dealers charge and online warranty companies even have payment plans.
AutoCheatSheet.com will show you how to buy an extended warranty and avoid dealer scams. Read our section on how to buy an extended warranty online.
Finance as little as possible once approved for a bad credit auto loan to get you over the hump. Let's say you get approved for a $20,000 bad credit auto loan and your interest rate is 18%, be smart and find a car that meets the same requirements but only costs $10,000 or $12,000. You may not get the exact car you want to drive right now, but you will be saving thousands of dollars in interest.
Interest Charges Over 60 Months
Vehicle price of $20,000 X 18% interest = $10,472.11
Vehicle price of $12,000 X 18% interest = $ 6,283.27
Difference of $4,188.84 or $69.81 a month
The key to rebuilding your credit is not the amount of money you finance, it's how responsible you are paying it back. Instead of paying 18% on $20,000, find a car you can live with to get you over the hump. The next time you buy a car you'll have proof of a good paid car loan on your credit and be able to buy any car you want and pay a much lower interest rate.
Your second option is after paying on a bad credit loan for 6 months to a year, you may want to look into refinancing your car. Refinancing will not only lower your monthly payment, it will also lower your interest rate and possibly save you hundreds, if not thousands of dollars.
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My Recommended Sites for Car Shoppers
MyAutoloan and InstantCarLoan are the quickest way to get a pre-qualified bad credit auto loan. These online sites will provide you with free, no-obligation quotes and the interest rates quoted are normally very good. You can also use these quotes to negotiate an even better interest rate with a dealership.