Auto Financing with Bad Credit

In the business we call it “challenged credit”. You would be surprised what does and doesn’t affect your credit score. If you have a low score, that is part of the game. The other part is how “thick” is your file? Do you have a good history of paying “big” loans off, like auto loans or other installment loans?

High Credit Score – Limited Credit History

Many college graduates come in with a super high FICO® score. They have a whole lot of deferred student loans and one $500 credit card they’ve had for 3 months. This will give you a high score, but it’s what they call a “thin” file because there isn’t a lot of breadth of credit experience. Someone in this situation would be considered “challenged credit” even if there is nothing derogatory in their credit file.  This is where a cosigner would help.  Subaru Motors Finance has a college graduate program that makes is easier for a recent grad to get a loan without a cosigner.

It’s Not You its the Bank

Of course, at a car dealership we want to sell you a car. The lenders get to determine if we do sell you a car. We are completely dependent on banks, finance companies and credit unions unless you are paying cash. Whether or not we sell a car is completely up to them in the case of bad credit. With bad credit, there is almostalways some lender willing to lend money, it’s the interest rates they charge that allows you to rebuild your credit that can stand in the way of us selling a car and making you a happy customer.

Approved Up To a Point

In cases where credit is the issue, some lenders will cut us back on the amount financed i.e. they will only finance “x” percent of the value of the car you want or they will only finance a given individual “up to ‘x’ dollars” (a certain amount of money) regardless of the car. In both of those cases that is where we would have to ask for more down payment or move down to a lower amount financed some other way (like a cheaper car). Sometimes – especially with used cars – a lender will require a shorter term, like 24 months or 36 months. This ends up raising the payment or alternately requiring more down payment to get to a payment that is in budget. Most people, if the bank will let them, go with 72 months (six years) to keep the payments lower.

Bigger Risk = Higher Interest Rate

People who haven’t paid bills on time, had collections/repossessions or people who are new to “big credit” like a car or other substantial installment loan, usually pay higher interest rates which I tell my customers is “buying their way into the credit world”. When possible, some people will refinance the loan at their local credit union or bank after establishing a solid payment history of at least a year or more. This means more of the payment they send in every month will go towards the car an less on interest. It also means when they’re done they will have two paid off car loans on their credit record.

Pay More Toward the Principal

Especially if you have a longer term car loan, pay it off early. I am personally sending and extra $50 every paycheck to Subaru Motors Finance so my loan will be paid off over a year early. Since auto loans in California must be “simple interest contracts”, that means there is a specific amount of interest added to the loan every day, called the “per diem”. By paying my loan off early I am saving a year’s worth of “per diem” interest, which has the effect of lowering the total dollars I spend on interest during the term of the loan.