Car Finance

How Much Auto Financing Can I Get with Bad Credit?

By Mike Richards Posted: 04/03/2018

Are you suffering from bad credit? Well, there is hope for you.

If you find yourself at a moment in your life in which you have to get a car loan, chances are that this is the only financing option you have. No one wants to secure a loan, let alone a car loan, on bad credit. But the reality of life is that at times it’s inevitable to look for an auto loan despite already being heavily in debt.

Nothing puts you in a more financially precarious position than a bad credit rating. Without having to go into details on what leads to bad credit, let’s look at your current bad credit situation and see how we can make the most out of it.

When you find yourself in a bad credit ditch, there are a number of options at your disposal to secure auto financing. Naturally, you will not be the most attractive client to potential auto financiers, but you will still be in a position to secure auto financing from a number of car loan lenders. And just because you are a subprime borrower does not mean you should jump at the first auto loan offer that’s made to you. You still have wiggle room, even within your bad credit, that should make you relatively attractive to a number of lenders.

A bad credit score is considered to be any score below 600. The worst credit score that one can mathematically get is 300 points. While the industry definition of a bad credit score is below 600, there are lending companies who will deem a credit score of 550 to 599 a good score and be willing to provide you with a car loan. To this extent, bad credit is relative, not to the industry standards, but to individual lenders.

As long as your monthly income is strong enough to absorb the impact of a loan on bad credit, there are companies that will be willing to extend an auto loan facility to you. However, you might find yourself restricted to an auto loan of a specific amount depending on the depth of your debt. Should the loan funds you get be insufficient to buy a new car, buying a used car would still be a great deal.

The amount of auto financing you can get on bad credit depends on the following factors.

How ‘Bad’ Is Your Bad Credit Score?

Credit scores generally range between 300 to 850 points. The lower your credit score, the worse your credit is. In practice, bad credit is anywhere between 300 and 599. However, it does not take a genius to understand that a credit score of 500 to 599 is far much better than that of 300 to 499. They may all fall under the same categorization of bad credit scores, but the reality is that you stand better chances with a higher credit score than a lower one.

To establish how much auto financing you are eligible for, you will need a thorough evaluation of your bad credit status. To do this, an honest professional evaluation of what your chances for an auto loan are is crucial. This will help you establish how much will be too much interest to pay, even with your dented credit rating. Consider hiring the services of a credit score specialist who can advise you on your best options besides helping you start the journey of repairing your credit.

Before you decide to settle on an auto loan lender, shop around and get comparative quotes from various auto loan suppliers. You might even be surprised by the number of lending companies willing to take you on board at a not-so-bad interest rate. The one temptation you will need to avoid is that of signing up for the first offer you receive.

Being on bad credit preconditions most people to think that anyone offering them credit is doing them a favor. To the contrary, every lender, even those who lend to subprime borrowers, have one aim: to make a profit, a lot of it. Therefore, you can be sure that they would want to make as much profit from you as possible. Don’t let them. Look for the subprime lender with the most competitive interest rates before signing up for a car loan.

Can Your Current Income Absorb A Car Loan?

A number of factors, not just bad credit, contribute to the state of your finances. There are many people enjoying low-interest rates due to their high credit scores who started out with bad credit. However, with fiscal discipline and commitment to financial goals, they gradually climbed out of the red line of bad credit. This could be your story too.

Your credit score can be affected by whether you make your monthly payments on time, the total number of accounts you operate, the number of hard credit inquiries conducted on you, the number of derogatory remarks filed against you, how you use your active credit cards, and the average age of your open credit lines.

Any of the above factors, or, as it is usually the case, a combination of all six, determines whether your credit score is good or bad. Some of these factors have a greater impact on your credit than others. This means that you could significantly improve your credit score by working on those factors that would make the greatest impact on your score.

But perhaps the most important factor in determining how much auto financing you get is your current regular income. In practice, it can take as much as two years to purge a bad credit report. Within this period, your circumstances may have changed significantly to the point where your current income can easily absorb a substantial auto loan.

Subprime auto loan lenders are aware of the fact that borrowers’ incomes improve with time, sometimes drastically. Credit scores, however, take time to reflect these improvements. To entirely rely on them without taking into consideration a borrower’s changed circumstances will end up denying a subprime borrower a facility they are fully capable of servicing.

Are The ‘Five Cs Of Credit’ In Your Favour?

The term ‘five Cs of credit’ refers to character, capacity, collateral, capital, and conditions. Every lender want to be sure that a borrower satisfies all the five Cs. While a person seeking an auto loan on bad credit may not score very well on all the 5Cs of Credit, most borrowers are keen to establish a client’s credit history (character): their record of making timely and regular loan payments.

The other consideration is the potential borrower’s capacity to pay the loan by looking at their recurrent debts and debt-to-income ratio. This is a critical consideration in deciding how much auto finance a borrower should be granted. However, in spite of a high loan repayment capacity, an auto lender may be hesitant if the client’s credit history (character) is unimpressive.

Capital is another factor that lenders consider before granting a loan. For instance, if a borrower is willing to put a substantial down payment on their auto loan (could be anywhere from 2%), this is a good indication that they are unlikely to default on the regular payments. It demonstrates their willingness to repay the loan within the contractual period. A borrower may also consider buying a used car instead of a new one to avoid sinking further into debt.

The other C refers to ‘collateral’ and assures an auto loan lender of recovering their money by repossessing the collateral should the borrower fail to repay the car loan.

The last, C (conditions), which refers to the interest rate and the principal amount applied for, encourages or discourages a lender from offering an auto loan to a subprime borrower. Other conditions that a lender factors include the purpose for which a borrower applies for a loan.

Conclusion

While it’s more difficult to secure an auto loan on bad credit, there are many auto loan lenders willing to take a chance on subprime borrowers. However, the amount of auto loan financing you can receive depends largely on how bad their credit score is and their ability to repay the loan in spite of their debt. At the end of the day, an auto loan lender will subject every borrower to the 5 Cs of credit before agreeing to an auto loan request.

Comments