Auto Net Financial News

Most consumers who apply for a bad credit car loan are new to the process. Especially in the current economy, many of these consumers may have gotten a regular car loan in the past and don’t understand how special finance works.

The lender and your car budget

At AutoNet Financial, we have, for over 17 years, been helping bad credit car loan customers reestablish their credit. Here are a few of the things we have learned:

Rule number one in the special finance process is that the lender will determine your budget for a new vehicle. The reasoning behind this is simple: guidelines for a bad credit car loan are much stricter than for a regular car loan. When a credit application is submitted, the lender will look very closely at the income and expenses of the applicant. In fact, the bank will require that the income stated on the application must be proven with pay stubs that show the income during the current pay period as well as all income year-to-date. Loan applicants may also be required to prove job tenure with a W-2 from a prior tax year or years.

Any additional income, such as child support or disability, needs to be verified with the relevant court documents, determination letters and/or bank statements.

Once the lender determines your income relative to your monthly debts (as listed on your credit report), it factors in additional costs, such as utility payments and car insurance, and comes up with a budget range for a payment that it believes the applicant can afford.

Getting approved

Unlike traditional banks, bad credit car loan lenders look for ways to approve applicants. Putting much of the emphasis on the FICO score (credit score) aside, these lenders will look for a history of situational bad credit (with a low score being caused by  a single or series of events outside the control of the applicant – such as a job loss or catastrophic medical event). The lender will also look at the number of accounts that have been paid on-time in both the present and the past to determine a pattern of “willingness to pay.”

If the application is approved, the bank will then place the customer in one of their “tiered” programs based upon the credit score and credit history. This program will dictate the interest rate, contract term and down payment requirements. Once this has been determined, the approval, along with any additional requirements (called “stipulations” or “stips”) will then be sent to the dealer.

Determining the correct vehicle

Once the special finance department receives the approval information from the lender in the form of a “payment call” (the maximum allowable monthly payment), the finance manager will then determine which cars in inventory fit the approval requirements (based on year, mileage, and payment requirements). With most subprime lenders, the newer the car and the lower the mileage the longer the loan term allowed, although these parameters are offset by the generally higher price of these vehicles (which is why newer, smaller cars usually work the best).

Why some cars won’t work

Most customers that have not financed a car with a subprime lender choose a car based on what they like – color, model or type. As an example, it could be a 5 year old SUV with 70,000 miles on the odometer. Even though this vehicle is clean and drives nicely, the interest will be higher due to its age, and a service contract (which you’ll want, especially for a sport utility) will also be more expensive. In addition, the term may also be shorter due to the mileage. In other words, it may look nice, but it also may not fit the payment call.

The Bottom Line

By understanding the buying process, bad credit car loan customers can avoid being disappointed by looking at the wrong kind of car. Remember, the object is to get your credit back on track, not buy your dream car. For more information about subprime car loans, go to www.autonetfinancial.com. Our website has calculators to help you determine your budget as well as a loan resource center that can help with your questions. If you need additional assistance, our toll free number is listed at the bottom of every page. Here at AutoNet Financial, we want you “on the road” to better credit.