Bad Credit Car Buying? 5 Things Subprime Auto Lenders Look At

Do you know your credit score and how it impacts your search for used cars in Cincinnati? Yes, we’re talking about that pesky three-digit number that will follow you around your entire life. For some people, their credit score isn’t a problem because they’ve established their credit history and proven they can responsibly handle their debit. However, this isn’t the case for others, whose low credit scores can make it hard to finance a used vehicle, creating a seemingly endless cycle of financial turmoil. What do we mean?

You’re a young professional looking to purchase a used Chevy Malibu, an efficient sedan that will get you to and from work. Unfortunately, you don’t have a strong credit history because of your age and recent entry into the professional world. In fact, you don’t have any credit history, which makes it near-impossible to find a lender who will loan you the money needed to make the purchase. Without the money, you can’t purchase the car, and without the car, you can’t get to work and risk losing your job. Once unemployed, you can’t pay your bills, which negatively impacts your credit score and puts you back at square one.

Fortunately, the cycle isn’t endless when you work with dealerships like ours. We know that financial trouble can affect anyone. However, we don’t believe that it should define your entire future. By learning more about your credit score and your finance options, you’ll discover plenty of opportunities to get behind the wheel of a reliable vehicle that will put you on the road to greater financial freedom.

Understanding Your Credit Score

Think of your credit score as your financial reputation. The score, which ranges between 300 and 850, reflects your creditworthiness or how responsible you are with managing your debt. For example, let’s say that your brother asks you for a $1,500 loan, but you know that he always asks people for money and never repays them. His credit score, from your perspective, is low, which makes you hesitant to loan him any money. On the other hand, let’s say that your sister asks to borrow the exact amount and you know that, without a doubt, she’ll repay the loan as soon as possible. In your eyes, she has an outstanding financial reputation (high credit score), which makes it easier for you to lend her the money.

The Credit Score Scale

Unlike the example above, your actual credit score isn’t based on perspective. Instead, it’s based on several factors that lenders use to determine the risk of loaning you money. These factors determine your overall score and where you fall on the scale. For example, credit scores between 800 and 850 are “Excellent,” 740 to 799 are “Very Good,” and 670 to 739 are “Good.” A “Fair” credit score falls between 580 and 669, while a “Poor” score is between 300 and 579.

Credit Score Factors

So, what factors make up your credit score? Experian, Equifax, and Transunion are the three major credit reporting agencies in the United States that are responsible for reporting your credit history. These reports are based on five unique factors: payment history, the total debt owed, length of credit history, types of credit, and new credit.

• Payment history makes up 35% of your score and shows if you repay your debts on time and in full, explaining why late payments and failure to pay or defaults dramatically impact your credit score.
• Total debt owed makes up 30% of your score and looks at how much available credit you’re using. For example, maxing out your credit card can negatively impact your score.
• Length of credit history makes up 15% of your score. The longer your history, the better.
• Types of credit make up 10% of your score and look for a balance of revolving credit (credit cards) and installment credit (car loans or mortgage).
• New credit makes up 10% of your score and looks for recent credit inquiries and newly opened accounts.

Low Credit Score? No Problem

Many people don’t think about their credit score until it’s time to finance a vehicle, which can leave them in a stressful situation if they discover that their credit score isn’t ideal. We encourage our customers to monitor their credit scores to avoid any surprises and give them ample time to work toward improving how they manage their debt. This improvement can be as easy as making your payments on time or limiting the use of your credit cards.

Even with these improvements, it can take time to improve your credit score. However, that doesn’t mean you don’t have options when it’s time to purchase a vehicle. Dealerships like ours work with a variety of lenders, which means that we can work with all types of credit.

Subprime Auto Loans

Subprime auto loans are designed for individuals with limited credit histories or low credit scores. The lender, referred to as a subprime lender, acknowledges the heightened risk of the loan by charging a higher interest rate than a traditional auto loan. The lender may also charge penalties or other fees if the loan isn’t repaid by a predetermined date.

As a whole, there isn’t a designated cutoff score for a subprime auto loan. In other words, a score of 450 doesn’t automatically qualify. However, the general rule is that individuals with a FICO credit score between 450 and 650 will likely qualify for a loan.

Looking at the Numbers

While we can talk all day about interest rates and credit scores, the best way to understand is by looking at actual numbers and what a subprime auto loan might look like for you. For example, let’s say that your credit score is “Excellent” and that you easily qualify for a traditional auto loan at an interest rate of 4.2%. Your high credit score shows that you can responsibly manage your debt and that the risk of loaning you the money isn’t great, which means the lender charges a minimal fee for giving you the loan.

Now, let’s say that your credit score is 550, and you qualify for a subprime auto loan. Unfortunately, you pose a greater risk to the lender and, as a result, are charged an interest rate of 12%. The significant increase safeguards the lender, who may also charge you a penalty if the loan isn’t repaid early. However, even with a higher interest rate, you still qualify for the loan and can make the purchase.

Putting It All Together

Credit scores and auto loans don’t have to have a love-hate relationship. Sure, having a low credit score or a limited credit history makes it harder to get approved for an automotive loan. It doesn’t, however, make it impossible.

Knowledge is power, so we encourage our customers to look deeper into their credit scores before they start their search for a used car in Cincinnati. Your credit score gives you a better idea of the type of loan–traditional or subprime–you will likely qualify for and what you can expect throughout the buying process. If you walk into the dealership knowing that your credit score isn’t ideal, you won’t be surprised if a lender denies your application for a traditional loan.

In any case, know that dealerships like ours are happy and excited to work with you. Our goal is to help you find a vehicle that meets your driving needs at a price you can afford. Regardless of your credit score, we’ll help you get back on the road, breaking the endless cycle that’s often linked to that pesky three-digit number that follows you around for life.