One main factor that any lender will look at when applying for an automobile loan is the borrower’s credit rating, especially when the applicant has less than perfect credit. Most people believe that having a poor credit rating will prohibit them from obtaining financing for a vehicle, and a lot of times the only chance at qualifying for a loan will be at a local “buy here pay here” auto lot.

Finding a car dealer that finances people with less than perfect credit may be easier than one may think. Like home loans, car loans may differ in many different ways and one should be aware of these rules.

These three factors are the true key to financing: collateral, character, and capacity, and will play an important role as to whether or not the application is approved.

Collateral

The type of car or vehicle looking to be financed. The loan amount on the car (LTV) should generally not be in excess of 120% of the Blue book value. Lending institutions will typically look at the length of the loan to see if it is eligible given the applicant’s credit profile.

Character

Car loan lenders will many times base credit profiles off two factors; habitual & situational credit. Situational credit consists of a person who generally makes all payments on other debts on time, but due to unexpected circumstances such as a divorce or job loss, the applicant now has less than perfect credit when applying for car financing. Habitual credit is when a borrower shows a constant pattern of making late payments or defaulting on loans over and over again. Even though both habitual & situational credit are not looked at favorably, those with habitual credit have a much less chance of being approved and/or will come with a much higher interest rate on the loan.

Capacity

This is the amount the applicant can truly afford to finance based off current monthly income and monthly expenses. If your finances show you will not be able to afford other expenses because of the added car payment, then the lender will determine you do not have the capacity to finance such vehicle.

Three factors any reputable lender will scrutinize when determining qualification is the applicant’s credit history, amount of down payment, and credit application.

Bad credit car loans, or high risk car loans, are specifically made for people that either do not yet have a credit history, have a credit rating (FICO score) less than 620, or derogatories on their report which will cause conventional car loan lenders to deny the application.

Lending institutions that finance bad credit car loans search various factors to help an individual get approved for a vehicle. Unlike conventional loans, these loans will many times come with higher interest rates because there is a higher risk of default. But remember if you are able to make all payments on time, it is likely your credit history will slowly reestablish itself and you may be able to obtain a conventional car loan in the future.

Keep in mind that many lenders do not offer bad credit car loans, and accidentally applying with a lender who only allows conventional loans will cause a credit inquiry. Many people who are in this situation will apply at multiple dealers to later find out that each inquiry is actually damaging their credit score further, leaving the borrower with a worse credit rating and less of a chance getting approved.

Another issue to keep in mind is that not all lenders that offer bad credit loans will report the account to the three main credit bureaus. If this is the case, obtaining this type of loan may not help you reestablish your credit rating if the lender refuses to report the debt.

Knowing Your FICO:

Lenders tend to look at various factors in an applicant’s credit report including the amount of information provided. The more information available and more years on the credit report, means there is more information for the lender to base their decision from. Very little credit information or none at all may not be eligible for an auto loan. The first step you will want to take when searching for an auto loan with bad credit is to obtain a copy of your credit report and ensure that all information is correct and reported accurately.

Your FICO score, the 3-digit number commonly ranging from 300 – 850, is based off past accounts and how those accounts have been managed. The higher the FICO score, the less of an interest rate and longer loan term may be available. Generally, credit scores 620 or less are referred to as subprime borrowing range, 640 – 720 near prime financing, and those with 720+ FICO’s are prime and have an excellent chance obtaining a auto loan with favorable terms.

Always remember to shop around!

Even though you may find quite a few lenders willing to offer a car loan despite your credit history, they are typically gonna be harder to find and determine the best deal for your situation. Most people tend to take the easy way out and let the first dealer they find try to obtain financing for the vehicle. Although this could be a good thing especially if you need a car fast, remember they are always also looking to make a profit as well. This could result in higher interest rates and less favorable terms than you may find elsewhere.

If possible, try to avoid dealer financing and look to secure your own financing before purchasing the vehicle. While there are online searches and websites that may offer auto loans for those with less than perfect credit, it is always a good idea to shop around local banks and credit unions as well. You may want to inquire about this with any bank you may already have an account with, even if it is just a personal bank account. Many banks seem to favor those whom they have already done business with than first-time applicants with the same credit history.

Improve your credit score and increase your chances of obtaining a car loan. Here are a few tips to help you improve your credit score and avoid unnecessary derogatories: pay all other accounts on time, keep credit card balances low and cancel any unneeded accounts, and make sure you do not have an excessive amount of inquiries on your credit report. Keep in mind that accounts with a zero balance can actually work against you, and multiple inquiries within a short period of time will have an affect on your report and lower your overall rating.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.