Building loan: how to do it with a car loan
Well-managed credit can do wonders for your credit score. But it’s not always easy to get approved for new credit when your credit score needs improvement. If you need a car loan with less than perfect credit, there are auto lenders who could help you fix your credit and your car-free situation.
How credit improves credit
When you hear “Your credit is bad” from a car lender, it is probably referring to your credit score. Lenders use credit scores to determine if you are a suitable borrower to be approved for a loan.
Often, bad credit borrowers are denied vehicle financing by traditional lenders. A low credit score is one of the most common reasons for refusal of financing. Even if you show a lender that you have the income to pay off a loan, a bad credit rating might be the only reason you’ve been denied vehicle financing.
And if you have bad credit or no credit history, you may have been told that one of the best ways to build credit is to take credit – but what does that mean?
Credit is borrowed money; credit reports are detailed records of your current and past borrowing history; your credit rating is a snapshot of your creditworthiness based on what’s on your credit reports.
Credit is an agreement between you and a lender, in which you agree to repay the borrowed money that you use to buy something, such as a vehicle. The more on-time payments and the more types of credit you have on your credit reports, the higher your credit score is likely to be. The two main types of credit are revolving credit (credit cards) and installment credit (like auto credit).
Your FICO credit score is a three-digit number between 300 and 850 that lenders use to quickly assess your ability to repay borrowed money. Your credit score is generated from your credit reports, which record your credit repayment history (among other things).
By accepting new credit, you enrich your credit reports. And if you have bad credit, you want to start building your credit history, then a subprime auto loan can be right for you.
Auto loans for bad credit borrowers
Getting approved for a car loan when you have poor credit can be difficult, but it is not impossible. There are lenders to help borrowers with bad credit and no credit.
While one of the most common ways to get a car loan is through a bank or credit union, dealerships also have loan partners. And some are registered with bad credit lenders called subprime lenders. Dealers with poor credit resources are often referred to as special finance dealers.
At a dealer specializing in financing, the first thing to do is to apply for car financing at the finance department. If you are approved, the subprime lender describes the car loan agreement and tells the special finance director your maximum payment for your car. From there, you choose a vehicle that fits your needs, the lender’s specifications, and your budget.
Qualifying for a subprime car loan means proving you have financial stability. Subprime lenders aren’t just limited to your credit reports and income – they also take into account your work history, life stability, your down payment amount, and more.
Build credit once you get it
Getting approved for a car loan is just the start of fixing or building your bad credit history.
To truly increase your credit score, you need to pay all of your bills on time, keep revolving credit balances low, avoid repossession, and keep all of your other household expenses down. Bills like your electric bill usually don’t automatically report to the credit bureaus – but if you start missing payments, those missteps are likely to get reported and hurt your credit score.
Payment history is the most important factor in your credit score: 35% of it. By paying all of your loans and bills on time, you’re on your way to a better credit score. In addition, if you have negative marks on your credit history, almost everything falls off after seven years. Each year, these bad grades also have less impact over time. Repairing your credit rating can take time, but improving your credit means saving money when you need to borrow.
A better credit rating means a higher likelihood of qualifying for lower interest rates on things like a car or a house. Interest charges can add up quickly, lead to higher monthly payments, and overall could mean paying more for your car than a good credit borrower.
Taking on new credit and paying it off responsibly improves your chances of getting better terms on your future loans. However, it all depends on whether you pay your bills on time – missed and late payments, accounts sent to collections, and overdue loans all lower your credit score.
Find a Special Financing Dealer
Getting approved for a car loan with less than perfect credit doesn’t have to be a problem. But finding a special finance dealer can be difficult because many dealerships don’t advertise who their loan partners are.
Here has Auto Express Credit, we want to help you find a reseller who has signed up with subprime lenders. Through our nationwide network of special finance dealers, we can find a dealer in your area who is able to help you with all kinds of unique credit situations.
Start by completing our free car loan application form. We will get to work, and there is never an obligation.