Get a Car Loan with Bad Credit

The staff at |WashingtonAutoCredit.com has been helping people with bad credit get car loans for several years now. There are many people in tough financial situations trying to buy a vehicle, but most of those people do not know how to help themselves get their next car loan and start rebuilding their credit. Every situation is different, here are some general guidelines that might make buying a car with bad credit a little easier on you.

1. Know Your Finances

You want an affordable car payment. The lender wants you to have an affordable car payment. What is an affordable car payment? That depends on lots of factors. If you have never had an auto loan before, or have never had an auto loan that did not end as a repossession, |WashingtonAutoCredit.com strongly recommends you do not get a loan of more than $300-$400 per month. Every lender has different rules, but in the personal experience of the Washington Auto Credit staff, it is better to keep your first car payment at or below this range. The bank will determine your maximum monthly payment by using a combination of three factors.

First, they will examine your Debt-to-Income (DTI) ratio. Your debt-to-income ratio is a way of calculating how much debt you have. Take your gross monthly income and multiply that number by the lender’s maximum DTI percentage (usually 40%-50%) the resulting dollar figure is how much monthly debt that lender will allow you to have, including your new car payment. To make sure you are under their limits, add up all of your monthly credit card payments, rent or mortgage payments, and other monthly debt that is not food or utility related. Congratulations, you have now calculated your monthly debt. As long as that number, plus your estimated car payment is under that 40-50% of your gross monthly income, you should not have a debt issue on your new loan.

Second, the lender will calculate your payment-to-income (PTI) ratio. If you make $5,000 per month, and have no other debt, you could qualify for up to a $2,500 per month car payment if a lender ONLY used a 50% debt-to-income ratio. To make sure that does not happen, lenders also will often limit your maximum payment with the PTI maximum. Take your gross monthly income, and multiply it by 15%-25%. The resulting range is what most lenders will use to help them determine your maximum payment. Different lenders use a different number with different credit grades.

Third, the lender will look for any previous loans you have had, the monthly payment of those loans, and how well those had been paid. Most lenders have their own score card, and the policies vary from bank to bank, but if you have done a good job on previous auto loans, and you can afford it with your current income, the lenders will usually give you a fairly generous maximum payment. Conversely, if you have had car loans that were paid poorly in your past, the lender may decide to give you a lower maximum payment on this loan.

2. Be a Citizen

It sounds funny, but a lot of people do not leave much of a paper trail. Utility bills, lease agreements, cell phone bills, bank statements going to a physical address and not a PO Box, little things like that can make the difference whether or not your auto loan goes through. People that can at least show the accountability to these types of debts and contracts (and have the bills in THEIR name, not someone else’s) are often seen as much better credit risks than people who use pre-paid phones, or have utilities and rental agreements in other people’s names. Lenders call these documents Proof of Residence (POR) and nearly ALL bad credit auto lenders require some POR documentation to give a loan. You wouldn’t lend someone thousands of dollars if you did not know where they lived, would you? If you have had a tough time with credit in the past, you may have to pay a deposit to get phone service, or other utility bills, but that type of accountability will come in handy on your next car loan.

3. Have PROVABLE Income

This topic is closely related to number two, but needs its own number because of how important it is. Lenders want to see your pay stubs. If you have bad credit, theres is little you can do about it. If you have good credit, auto lenders do not generally need to see your pay stubs and you will be able to get a reasonable loan with little or no trouble because you have shown the ability to pay your bills on time. (Quick question: If you have good credit, why are you reading this article?)

Often a client will walk into the |WashingtonAutoCredit.com office, sit down, and say they make $X,XXX per month, but the Proof of Income (POI) shows half of what they say they make. There are usually lots of excuses: “I get paid under the table sometimes”, “I was sick for a week”, “I just got hired back”, the list goes on. Most lenders to not look at your most recent check amount, they are more concerned with your Year-to-Date gross (YTD). Some excuses are acceptable, some are not. Just make sure you are honest with the person helping you with your loan because if the bank catches you in a lie, your loan will probably be turned down. If you have a reasonable reason for any time away from work, or low hours, the problems can usually be overcome.

4. Save a Reasonable Down Payment

Everyone knows that putting money down on a car loan is better than not putting money down. Do you know why? Sure, you could choose to have a lower monthly payment because you would be borrowing less money. It is bigger than that. You can almost always get a better interest rate by putting a significant amount of money down than you can by putting little or nothing down. The reason: Loan-to-Value (LTV) ratio. The lower the loan amount compared to the cars value, the less risk the lender assumes on the loan. This works whether you have good credit, bad credit, or no credit. If the vehicle you buy is worth $25,000 to the bank, but the loan is only for $15,000, it makes sense that you would get a better loan on that vehicle, right?

If your credit is REALLY bad, or if you are dealing with negative equity on your trade-in, you might not have a choice but to come up with a down payment. There are a few different factors that can affect exactly how much you need to put down.

First, there are several degrees of bad credit. Score alone is not an indicator. The timing of your loan request compared to when any derogatory periods occurred on your credit (slow pays, repossessions, collections, charge-offs, etc.). The older those bad credit items are, and the closer they are to each other (chronologically) the better it looks on your credit now. As an example, if you repossessed a car last month, and want to buy a car today, it is probably going to take a lot more money down than it would if you repossessed a car two years ago and have not had any other negative items on your credit since then.

Second, any and all good credit you have had matters. If you have had auto loans before, that were paid well and eventually paid off, it will look a lot better to a lender than if all of your previous auto loans ended in repossession. The more staple periods of time that show on your old credit lines the better credit risk you will look like on your next loan.

If your credit is less than perfect, put SOME money down. Whether it is $1000, or $3000, if you come up with some money down, you will probably have better loan options available to you than if you did not.

5. Be Flexible on Vehicle Type

With gas prices the way they are today, it is amazing the sheer number of people that the| WashingtonAutoCredit.com staff talks to everyday who want to buy a big SUV or Pickup. Can you guess what the hardest types of vehicles are to buy if you have credit problems? Big SUVs and Pickups. Why? The majority of lenders that specialize in bad credit auto loans want to lower their risk in any way they can because their clients are high risk. One of the ways that a lender will lower their risk is by stipulating that the vehicle they are willing to lend on for a particular client have very low miles, and be a recent model year. They do this because, statistically speaking, the #2 reason for a car loan going into default is people not making their payments because the car is broken down and in the shop. Even though people are supposed to make the payments no matter what, and it is not the banks fault that their client bought a car that is breaking down, people still often stop making car payments when the car is not working properly. (The #1 reason for loans defaulting is loss of job, in case you were curious.)

Have you priced late model SUVs and Trucks with low miles lately? They are expensive, especially with 4-wheel drive. Concede the fact that if you have bad credit, you will not be able to get a really low interest rate, and the payments will be really high. Monthly car payments for bad credit customers on a low mile late model 4×4 with a small down payment (less than 20%) often start in the $500-$700 per month range.

The vehicles that tend to work best are late model, low mile, mid-size and compact cars. These types of vehicles will cost less and give you an affordable monthly payment.

If you have bad credit, an auto loan should be used as a tool to re-establish your credit. If you try to buy the most expensive vehicle you can be approved for, you will usually be much more upside down when you look to trade that car in or refinance it in a year or two. With several years experience, |WashingtonAutoCredit.com can confidently say that it is better(in the long run) to buy the least expensive vehicle that meets both your family’s NEEDS (not wants) and meets the lender’s guidelines. If you get a short term loan on an affordable car to re-establish your credit, you would still have the option to buy the car you really want next time because you will be paying a lot less money in interest every month, be less upside down.

If you are interested in applying for an auto loan with |WashingtonAutoCredit.com, you can click the link and go to the website, or you can call 888-300-3502 and ask any questions you might have or apply by phone.