Bad Credit? Here’s What to Expect During the Auto Loan Process

If you have bad credit and need a car, you may not be sure where to start. There are a lot of misconceptions about getting an auto loan if you have bad credit.

You’ve probably heard that you can only go to a bad credit car dealership or a buy-here-pay-here lot. This isn’t the case for car shoppers with bad credit. Dealerships have many lenders they work with to get you a car loan.

buy here pay here car lot

Consumers with bad credit don’t necessarily have to buy a car at a buy-here-pay-here lot. Dealers have many lenders that can finance an auto loan for subprime borrowers.

We talked to Paul Gillespie, senior vice president of dealer services at AmeriCredit (pictured below), to find out how consumers with bad credit can get a car loan. AmeriCredit is an automobile finance company based in Fort Worth, Texas that deals primarily with subprime borrowers.

Q: What credit scores do you work with for auto loans?

A: We target credit scores between 500 and 680. The lowest is 500 because the ability to sell those loans in the secondary market is hard and credit performance drops below that level.

Q: What are the top 5 things you look at when reviewing a consumer’s car loan application?

1. Payment-to-income ratio. Are they buying a car they can afford? The car payment should be no more than 15% of their gross income, preferably 10%. So if someone brings home $3,000 a month, they should have a $300 to $350 monthly payment.

2. Income level. The minimum level we look at is $2,000 to $2,500 a month. We look at the applicant’s other obligations as well.

3. Time in the credit bureau. We look for them to have 5 or more years of credit history. Having 5 to 7 trade lines is good. Previous auto credit is a plus.

4. Are they trading in a unit (car)? If not, are they taking on another payment?

5. Are they putting any cash down? With all the aggressive rebates right now, we don’t give as much weight to the down payment. The manufacturer rebates are bringing the car back down to its real value. The more cash down, the more commitment the borrower has to repay the loan.

Q: What is the default rate on the auto loans you fund?

A: About 2.5 to 3% of our auto loans are 60+ days delinquent. (Editor’s note: According to AmeriCredit’s 10-Q SEC filing on May 11, 2009, as of March 31, 2009, 6% of its loans were 31 to 60 days delinquent, 3% were more than 60 days delinquent and 0.4% were in repossession.)

Q: How does a bankruptcy filing affect getting an auto loan?

A: If they are currently in bankruptcy, then we won’t approve them. If they filed bankruptcy and the bankruptcy has been discharged, we will look at this application. We can’t tell most of the time what life events someone has encountered, like a divorce, for example, but we’ll look at their income.

Q: What if the applicant was laid off from work and now has a new job, but hasn’t been working there for a long time?

A: We don’t necessarily consider that a negative. As long as they can prove their income and other personal information, we will consider their application.

Paul Gillespie, senior vice president of dealers services, AmeriCredit

Q: What should car shoppers with bad credit know before they apply for an auto loan?

A: They need to be prepared to disclose all their information. We’re more focused on verification of income today. They need to be ready to prove anything they put on the loan application. Underwriters are doing more to verify information. There’s no upside to fudging your application. It just takes one or two things that can’t be verified to be denied.

They should buy a car that makes sense financially. Know what your maximum payment is that you can afford. Be conservative. Dealers will try to up sell you. Stand firm on your payment number. Realize that if they try to sell you add-on products, this will increase your monthly payment.

Q: What should car shoppers do if they were denied for an auto loan?

A: Who were they denied by? Most dealers will send their application to several sources to find funding. One or two may approve it and one or two may reject it. There are many other lenders out there. Just because they were denied at one dealership doesn’t mean another dealer can’t help them.

Q: Should car shoppers with bad credit have a down payment ready to put down?

A: This depends on the lender. Some want 10 or 20%, and some will fund 100% of the loan. In general, having a 5 or 10% minimum down payment is a good rule of thumb.

Q: What interest rates should a subprime applicant expect to receive if approved for a car loan?

A: It depends on which state they’re in. Some states have usury caps and ceilings, some don’t. They may get an interest rate in the mid-teens to mid-20’s in some states. The rate can vary by the car’s model year too. They should know that they aren’t likely to get a single digit interest rate. And they need to calculate this into their monthly payment.

Q: Should someone with bad credit try to find a car loan online at an independent lender before they go to the dealer?

A: Online is not really a robust environment for subprime borrowers. The dealer is looking to sell cars. There are sources out there that can help them. The customer should not assume that they will get denied if they try to get an auto loan through the dealer. Many dealerships have lenders they work with who deal with subprime borrowers.

Q: Is credit thawing out at all?

A: More lenders are pursuing more volume than they were even a few months ago. We’re looking to grow our volume but are not changing our standards to qualify for a loan. Credit is pretty flat right now but will loosen gradually.

Q: How many dealers do you work with to give auto loans to their customers? And why should a dealer want to use you as a lender?

A: Right now, we have 7,000 active dealer relationships. AmeriCredit’s been a lender that’s been easy to do business with for dealers. We have people who will work with the dealer on each transaction. We have very experienced employees who give a high level of service to dealers.

So if you’re a consumer with a subprime credit score (generally, less than 650) and you need a car, don’t hesitate to try your local dealership. Now that you know what you can expect while at the dealer, hopefully your auto loan process will go smoothly.


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