Getting Started

You can never be too prepared for purchases as big as a car, especially if you're dealing with less than perfect credit. While most people know what bad credit is, not everyone understands what a bad credit auto loan is or how it works. If you're dealing with poor credit and need a vehicle, a subprime auto loan offers a way to get finance. It also gives you a chance to improve your credit as long as you make your loan payments on time each month.
Many dealerships aren't willing or able to work with borrowers with imperfect credit, but Florence & White Ford can help you. We're also here to help you make informed choices about auto financing. By knowing what to expect and planning ahead of time, you can set yourself up for success with your bad credit car loan.

What is a Bad Credit Car Loan?

A bad credit car loan isn't like a traditional auto loan. There are different requirements you'll need to meet, and because not every dealer has a special finance department, finding a subprime lender to work with can be difficult. Bad credit car loans are designed for buyers with less than perfect credit or no credit. They're great for getting you on track in the credit world and back on the road driving.
If you're thinking of applying for a bad credit auto loan, you'll need to do some prep work. Make sure you have these three things covered:

Request your credit reports and check your credit score
You first need to know where you stand with your credit. The majority of lenders look at your FICO credit score to determine your loan qualification. You're entitled to a free copy of your credit report once every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Make sure all the information is accurate and dispute any errors with the appropriate credit bureau. Checking your credit score can help when you research the interest rates car buyers in similar situations are typically able to qualify for.

You can estimate how much car you'll be able to afford by taking a close look at your budget. There's more to car buying than the price of the vehicle itself, so make sure you can also afford the cost of repairs, insurance and fuel. The last thing you want to happen when your credit is struggling is overextending yourself.

Prepare a down payment
Making a down payment on a bad credit auto loan helps you out in many ways. Most subprime lenders require a down payment, so saving up for one will help you get approved. Putting money down can also lower the amount of your loan, which leads to a lower monthly payment and reduced interest charges.
Preparation is key when it comes to buying a car. If you need a vehicle and poor credit is holding you back, we want you to understand that bad credit auto loans are designed to help car buyers just like you.

Typical Bad Credit Auto Loan Requirements

When you're faced with bad credit, getting a car loan isn't as simple as just picking out a new car, submitting a loan application, and signing the paperwork. Getting the financing you need while struggling with poor credit requires some additional steps and documentation. But the good news is that if you're serious about getting an auto loan, your credit doesn't always have to stand in the way. All you have to do is find the right lender and meet their qualifications.
While it's true that qualifications required by subprime lenders for bad credit auto loans cary, there are guidelines that are typically followed. Some of these are basic: you must be at least 18 years old, a current resident and legal citizen of the United States or Canada and have a valid driver's license.
Other requirements are more in depth, and need to be reviewed when you sit down with the finance manager at the dealership. These include, but aren't limited to:
  • Proof of income with current computer-generated check stub showing a minimum monthly pre-tax income of at least $1,500 - $2,000 from a single source. 
  • Proof of residency with a current utility bill in your name at the address listed on your application.
  • A minimum of six months at your current job, with at least three years of employment history and no major gaps in employment. 
  • Proof of a working landline or contract cell phone in your name. Pre-paid phone plans aren't accepted. 
  • A list of six to ten personal references with their names, addresses, and phone numbers.

Bringing these items with you when visiting a dealership is a great way to start the car loan process off on the right foot. However, these are just the basic requirements. Financially, there are a few more requirements you should be aware of before jumping into a bad credit auto loan.
First, subprime lenders typically need a down payment. Most will require at least $1,000 or 10 percent of the vehicle's selling price, whichever is less. Second, lenders want you to comfortably afford a car payment and auto insurance, as well as your other monthly bills.
To ensure this, lenders use two calculations: the debt to income ratio must be less than 50 percent, while your payment to income ratio can be no more than 20 percent in order to qualify for auto financing. Debt to income compares your monthly pre-tax income(s) to your total monthly bills, including a car and insurance payment. Payment to income calculates the percentage of your monthly income that goes toward your combined car and insurance payment. These ratios are easy to calculate yourself, and should be done as part of your budgeting before you step into a dealership.

Situational Bad Credit vs Habitual Bad Credit

Bad credit can be categorized into two different types: situational and habitual bad credit. When subprime lenders look at your credit profile, they'll take in account why your credit looks the way it does.
What is situational bad credit?
Situational bad credit is when your credit score drops due to something outside of your control. Many times, lenders who see car buyers with situational bad credit are willing to approve them for an auto loan. Examples of situational bad cred include:
  • Employment loss - If you were laid off from a job or took a big cut in income.
  • Divorce - If a divorce ended badly for you financially.
  • Illness or injury - If illness or injury left you with high medical bills, or time away from work.

What is habitual bad credit?
On the flip side, habitual credit is a spotty credit history due to poor long-term financial habits. Examples of habitual bad credit include:
  • History of late payments - The inability to make monthly payments on time is a big warning sign to lenders, especially if this extends over a long period of time.
  • Multiple bankruptcies - A single bankruptcy, though bad, is usually acceptable. Multiple bankruptcies on a credit report, however, are not.
  • Repossessions - If a repossession isn't included in a bankruptcy, or there are several appearing in your credit file, it's considered habitual.

It's important to have good credit practices, which means keeping up with your bills and payments. Lenders take your credit history seriously, so make sure you reflect on why your credit is bad and how an auto loan could help you on the path toward good credit.