With a good credit score, you can obtain approval from direct lenders such as banks or local credit unions and shop for a new or used car just like a cash buyer. However, if you have poor credit, most direct lenders may not offer you a poor credit auto loan. In such a scenario, your only option may be to work with a car dealership that has access to indirect subprime auto finance companies. These companies specialize in providing auto loans to people with poor credit.
Poor Credit Auto Loans – What to Expect
First and foremost, it’s important to understand that having a poor credit score means that you may be seen as a high-risk borrower to lenders. This means that you may be charged a higher interest rate, have stricter loan terms, or be required to put down a larger down payment than someone with a good credit score.
Stricter Loan Terms
Tighter loan terms may restrict the available vehicle options as lenders tend to limit the Loan To Value (LTV) for individuals with poor credit. Generally, such lenders will only lend up to 100% of the published used car value or MSRP for new cars. This means that if the car being sold by the dealer exceeds the published used car value or MSRP, the car buyer with poor credit would require a larger down payment to purchase the vehicle. Conversely, if the dealership is offering the used car below the published value or if the new car has cash rebate, the car buyer with poor credit would need a lower down payment, or in some cases, no down payment at all.
As we have previously discussed trading in a car with negative equity and poor credit, we won’t delve into that matter here, except to note that individuals with negative trade-in equity and a minimal cash down payment would have even more limited options available to them.
Lender Verification Process
Subprime lenders usually verify every item on your credit application. At a minimum they will verify your employment and income as well as your address.
- To verify employment they will contact your employer.
- To verify income they will request pay records or bank statements
- To verify your address they will request utility bills or statements with your physical address listed on the statement.
Sometimes the lender verification process slows down the approval process, especially if you visit the dealership after normal business hours or on weekends.
In summary, if you have poor credit and enter the auto loan process with the expectation of a higher interest rate, the need for a down payment, limits on your vehicle selection, and a possible delay while the lender verifies your credit application information, you will avoid disappointment. Before you begin the car buying process it’s also recommended that you have a good idea of what you can afford based on your income.
Good things Come to Those Who Wait
If you have a vehicle that can serve your needs and budget for a short time, it might be wise to postpone applying for an auto loan and concentrate on improving your credit score. By delaying the loan application until you have improved your credit score, you can likely reduce your monthly payments, increase your purchasing power, and save a considerable amount of money in the long run by getting better car loan terms.
To illustrate the impact of credit score on auto loan payments, consider a $25,000 used car loan with a 60-month term. If a car buyer with good credit secures a 5% interest rate and another buyer with poor credit secures a 15% interest rate, the difference in their monthly payments is significant. The table below shows that the borrower with poor credit would face a monthly payment that is $110 higher than the borrower with good credit. Over the length of the loan, the borrower with poor credit would pay more than $6,600 in additional interest compared to the borrower with good credit.
| Interest Rate | Monthly Payment | Total Repayment Amount | Total Interest Paid |
| 5% | $472.90 | $28,374.00 | $3,374.00 |
| 6% | $483.32 | $28,999.20 | $3,999.20 |
| 7% | $493.88 | $29,632.80 | $4,632.80 |
| 8% | $504.58 | $30,274.80 | $5,274.80 |
| 9% | $515.41 | $30,924.60 | $5,924.60 |
| 10% | $526.38 | $31,582.80 | $6,582.80 |
| 11% | $537.48 | $32,248.80 | $7,248.80 |
| 12% | $548.72 | $32,923.20 | $7,923.20 |
| 13% | $560.08 | $33,604.80 | $8,604.80 |
| 14% | $571.58 | $34,294.80 | $9,294.80 |
| 15% | $583.21 | $34,992.60 | $9,992.60 |
Improving Your Credit Score
So, how can you improve your credit score? Here are some tips to help you get started:
Check your credit report: Start by checking your credit report and score for any errors or mistakes that could be hurting your score. If you notice any inaccuracies, be sure to dispute them with the credit bureau or utilize a credit repair company to dispute them for you..
Pay your bills on time: Late payments can have a significant impact on your credit score. Make sure to pay all of your bills on time, every time.
Reduce your credit card balances: High credit card balances can hurt your credit score. Aim to keep your balances below 30% of your credit limit.
Don’t open new credit accounts: Opening too many new credit accounts in a short period can hurt your credit score. Avoid opening new credit accounts unless necessary.
Once your credit score has improved, you’ll be in a much better position to secure an auto loan with better terms.
If your transportation needs are not an emergency, it’s best to wait and focus on improving your credit score before getting an auto loan. By following the tips outlined above, you can work towards improving your credit score and securing better loan terms in the future. Be patient, and don’t hesitate to seek help from a credit professional if needed.
AutoByPayment.com offers accurate estimates of new car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.