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For most of us, vehicles are a necessity. A reliable source of transportation is essential to making it to and from a job and fulfilling other obligations. At Red Mountain Funding, we know that having a quality vehicle is a need, not a want. That is why we offer a variety of loan options, including loans for people with less-than-stellar credit. If you have a few dings on your credit report, it is still possible to obtain financing for a vehicle.
What Is a Bad Credit Car Loan?
Typically, a car dealership or lender makes a financing decision based on your credit “tier.” A person with a credit score of 700 or above might be considered a well-qualified buyer and enjoy lower interest rates. In general, credit tiers range from poor to excellent:
- 300-499: Bad
- 500-579: Poor
- 580-619: Fair
- 620-699: Good
- 700+: Excellent
Several factors may affect your credit rating, but the main components are history of on-time payments, debt-to-credit ratio, length of credit history, and types of credit use. If you have a high debt-to-credit ratio, have a history of making payments late, or do not have an established positive credit history, you might have “bad” credit. This will make it harder for you to obtain conventional financing for vehicles and other large purchases.
How Do Lenders Determine Credit Worthiness?
To further complicate matters, your credit score might look different when compared across major credit bureaus. Three main credit reporting agencies currently operate in the U.S.: Equifax, TransUnion, and Experian. Since lenders may report only to one bureau, your score could be significantly higher or lower in one bureau than it is in another. For this reason, most lenders look at an average of all three major credit bureaus and obtain an aggregate score, called a FICO score.
The FICO score provides a baseline score to help lenders determine your likeliness to make on-time payments. While a bad score may make it more difficult to receive financing, it is by no means a final decision. Some lenders will allow you to borrow after taking a more holistic view of your credit history and current situation.
What Types of Situations Lead to Bad Credit?
Some people are surprised to learn that they have bad credit. It can be disheartening to learn that a credit score may deter you from driving away in a new vehicle. If you recently learned you had bad credit, it can be helpful to know the most common explanations for a low score.
Your Credit Utilization Is Too High
An important metric contributing to your credit score is utilization. Your utilization represents the amount you have on your credit cards each month, reflected as a percentage. If you have one credit card with a limit of $1000 and a balance of $800, for example, your credit card utilization would be 80%. By maxing out your credit card, you could look risky to lenders. According to data analytics from Experian, the average person with a score below 600 has a credit utilization of 77.2%. By contrast, those with a score of over 760 have an average credit utilization of 5.6%.
You Have Bills in Collection
When an account becomes delinquent, a creditor may report your debt to a collection agency. Once an account goes into collection, the agency attempting to collect the debt might report your delinquency to a credit bureau. The only thing that will heal a collection is time. A delinquency will fall off your report within 7 years.
You Consistently Pay Bills Late
Your payment history comprises 35% of your FICO credit score. A history of on-time payments will boost your score; paying late will result in a few dings on your credit report. The damage can be worse depending on how long you avoid paying. An account that is thirty days past due, for example, will be less damaging than an account that is 120 days past due.
You Have a Loan Default or Credit Charge-Off
A credit card charge-off or loan default can significantly affect your credit. In a charge-off or default situation, your account is more than 180 days late and your creditor is writing off the debt as “bad” for tax purposes. Similar to accounts in collection, a charge-off or loan default can be a blemish on your account for 7 years. Despite the name, a “charge-off” does not exclude you from repaying the debt.
When a person has too many obligations to repay, a bankruptcy is often a final resort. While filing bankruptcy can relieve you of much of your debt, it can also seriously affect your ability to secure credit. Once filed, a bankruptcy will remain on your report for several years.
Bad Credit Car Loans Near Me
If you have less than average, poor, or bad credit, you may be wondering if it is possible to get an auto loan. Fortunately, lenders recognize that vehicles are a necessity, and that most Americans do not have the cash on hand to make such a large purchase. In fact, some research shows that 60% of Americans have $500 or less in savings, and around 50% of Americans have subprime credit (a score of 620 or less). That’s why some lenders offer bad credit auto loans.
A bad credit loan is a type of personal loan that is available to borrowers that have a low FICO score, because of bad or unestablished credit history. Many different types of financial institutions offer bad credit loans, but some are more trustworthy than others.
A common characteristic among bad credit car loans are high interest rates. Since it is harder for borrowers with poor scores to obtain financing, some lenders will charge exorbitantly high rates and other service fees, leaving borrowers little other choice but to pay them. This highlights the importance of talking to a reputable lender with a bad credit loan program.
The Advantages of Lending from the Dealership
Two main options exist for obtaining financing for your vehicle: a banking institution or a line of credit from the dealership itself. Pursuing a line of credit directly from the dealership is best for people with subprime credit for several reasons:
- More flexible financing arrangements. Banks are often required to follow strict rules regarding payment terms. When you work directly with a dealer, you have the option of negotiating terms that work better with your budget, such as extended-term financing (up to 72 months in many cases). This can lower your monthly payments and allow you to purchase a nicer vehicle, even with poor credit.
- It’s more convenient. Talking to an in-house financer will allow you the opportunity to explain your financial situation and credit history. It will also decrease the amount of paperwork that needs to shuffle between the dealership and financial institution, making the buying process simpler.
Choosing a Bad Credit Car Loan Near Me
Some preliminary research may reveal several different options for bad credit auto financing within your area. How do you know which lending institution is best for you? A few factors may guide your decision:
- How large is the loan you’re trying to obtain? For those with subprime credit, the “buy-here, pay here” options often offers the most flexibility. By purchasing a vehicle from the same place your obtain financing, you have more negotiating power with the dealership itself, which means you could get a much better vehicle than you would trying to secure a line of credit from another institution.
- How willing is a lender to work with your credit history? If you know you have a few blemishes on your credit that could affect your ability to secure a loan, tread carefully. A lender credit check constitutes a “hard pull” on your report, which could drop your credit score a few points for a short time. It’s important to do your research ahead of time and determine which lenders have bad credit car loans before you attempt to make a purchase.
- What is your timeline for purchasing a new vehicle? If you need a new car immediately, head to a dealership that offers in-house financing. A streamlined application process helps ensure that you can drive off the lot in a vehicle that will suit your needs, often in the same day.
If you have a few blemishes on your credit or have no established history, you may worry that your credit may keep you from securing a loan. Luckily, most lenders realize that vehicles are a necessity for getting to and from work and meeting other everyday obligations. As a result, several different bad credit car loan programs exist. However, not all are the same in terms of flexibility.
Red Mountain Funding offers financing for people with poor credit. Working with an in-house team can help you finance a vehicle that works for your budget.
In Arizona, simply apply online using our convenient application to get started today.
I’m a kid at heart disguised as an auto researcher and business owner. I’ve always enjoyed providing insight in the form of reviews (anime, video games, autos, etc.) When I’m not researching, I’m spending time with my family, driving my Dodge Challenger, riding my motorcycle, and finding new entrepreneurial pursuits.