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What is a Bad Credit Auto Loan? Summer 2023

Finance | 07/04/2023 20:28

If your credit score is less than perfect, is there any hope of getting a car loan? Car loans are easier to secure when your credit score is in good shape, but that doesn't mean it’s impossible to get a car loan with bad credit.



Here’s what you need to know about credit auto loans in summer 2023.

What is considered bad credit?


Credit scores are determined based on five different categories. 

  • Your Payment History (35%): Do you make your payments on time and in full?  

  • Accounts Owed (30%): How much debt are you in and much credit do you have available to you?

  • Length of Credit History (15%): How long have you had credit available to you?

  • Credit Mix (10%): Do you have a healthy mix of accounts that you balance?

  • New Credit (10%): Is there new credit available to you that is not yet reflected in your score?


All of these categories are assessed and you are given a score between 350 and 850. These scores are broken up into five different categories. 

  • 800 to 850: Excellent credit

  • 740 to 799: Very good credit

  • 670 to 739: Good credit

  • 580 to 669: Fair credit

  • 300 to 579: Poor credit


The better your score is, the more likely you are to be approved for a car loan. As your score drops lower, you will have an increasingly harder time getting approved for a loan of any type. 


When it comes to auto loans, a bad score is typically considered to be in the mid 600s and below. 

What is a bad credit auto loan?

A bad credit auto loan is simply a regular auto loan that comes with a higher car loan APR. Higher APRs are offered to offset the risk that a lender is taking by offering a loan to someone with poor credit.


Why is the risk higher when lending to someone with poor credit? Let’s consider the factors that make up credit scores again. The most influential factor is your payment history. If you have an inconsistent payment history and miss bills frequently, lenders may not recoup their money easily. Auto loans are secured loans, which means that your car serves as collateral for missed payments. If you stop paying your loan the lender will simply come and take your car as payment to ensure they don't lose money. But this isn’t an easy or cheap thing for them to do. It is much easier for them if you simply pay your bills. 


Bad credit loans, also referred to as subprime or second chance loans, have higher APRs and may have higher fines and penalties. 

Can you finance a car with no credit?


Technically it is possible to finance a car with no credit, but you will most likely need a cosigner to help you. You may find a lender out there who will give you a loan with no credit, but they will charge you a much higher interest rate and may require a higher down payment.

What do you need to get a bad credit auto loan?


If you have a bad credit score and need to get a car loan, you will need to have standard loan documentation but you may need to provide more information than a person with a good credit score.

  • A photo ID. All lenders will require a photo ID when considering a loan application.

  • Proof of income. This is usually required by a lender for any type of loan. Lenders prefer to see a current pay stub, and some lenders may have an issue with income such as disability or SSI.

  • Proof of residence. This is also usually required by a lender for any type of loan. You must have current proof of residence such as a utility bill. 

  • A working phone. Bad credit loan lenders may need a landline or contract cell phone from a national service (not a prepaid phone). They need a way to stay in touch with you in case of delinquency.

  • References. Some lenders may require references to vouch for your character. They may request 6-10 references–they can be family, friends, or coworkers–to help substantiate that you are worthy of a loan. They usually cannot reside with you and cannot live with your other references.


How to get the best bad credit auto loan.


The best way to get a loan when you have bad credit is to improve your credit score. Taking the time to pay off your debts and getting on a schedule with your payments can help you to secure a lower interest loan with less money down and less fees. This is also the case if you are looking to refinance a car loan with bad credit. 


But if you need to finance a car immediately and cannot wait until your credit improves, take the following steps to get the best loan.


Secure a higher down payment.

higher down payment may help you negotiate a lower interest rate. You may be required to pay a higher down payment either way. 

Explore your options and get pre approved.

Even with a bad credit score there are a lot of lenders out there that provide bad credit auto loans. Do your research and inquire with several lenders before deciding where to apply. Getting pre-approved beforehand will help to ensure that you have some leverage before heading into a dealership. Dealerships can make a lot of money off of you if you don’t have a bottom line when you walk through the door. Taking the time to get pre approved will save you money and frustration. And remember: pre approval is different (and better) than prequalification. Prequalification merely estimates rates while pre approval locks them in for a set time period.


Apply for financing during the same 14 day period.

Applying for financing (and preapproval) during the same 14 day period will ensure that your credit only takes one hit from your applications. If you spread out your applications too much it will affect your credit score negatively and put you in an even worse spot. 


While it’s possible to get financing when you have bad credit it’s a much better idea to take the time to improve your credit score.


Your credit score is the most important factor in the car loan APR you will be offered. Well, the most important factor that’s in your control anyway. If you can manage to stave off financing until your credit score improves you will be in a much better financial position.


If you have worked to improve your credit score and are ready to refinance, contact Auto Approve today!


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