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Bad Credit Car Loans: Breaking the Stereotype

“We’re sorry, but you don’t qualify for a loan.” It’s a statement every customer dreads when it’s time to make a significant investment, especially when that investment is a must-have like a vehicle. It’s all too familiar for many people who have struggled financially or are working to establish their financial footing. They’ve found the perfect vehicle, like a used Nissan for sale, that fits their needs and budget, but they can’t find a lender willing to take the risk and approve the loan. So, what’s the solution?

Traditional dealerships are often limited in who they can finance, with lenders setting eligibility requirements that typically ignore a large customer base. These lenders require high credit scores and well-established financial histories that ensure minimal risk. In other words, a higher credit score says there’s a better chance that the loan will be repaid and not defaulted. Unfortunately, this tunnel vision excludes many people, like young professionals who need a line of credit to build their financial footing or individuals who need a reliable vehicle and an automotive loan to improve their credit scores and keep their jobs. Thankfully, there’s an alternative–bad credit car loans.

What Is a Bad Credit Car Loan?

Every automotive loan works on the same principle—an individual borrows money from a lender (a financial institution) to purchase a vehicle. The loan is an IOU and a contract or promise to the bank, credit union, etc., that you’ll repay the borrowed amount with interest. So, what differentiates a bad credit car loan—also known as a subprime loan—from a conventional or prime automotive loan? Mostly, the interest charged by the lender.

Evaluating Risk: Interest Rates and Your Credit Score

Lenders take a risk anytime they approve a loan because there’s always a chance the borrower will not keep their end of the deal and fail to repay the IOU. It’s like a stranger approaching you on the street and asking for a $15,000 loan. Would you immediately hand over the cash without looking at the individual’s background to determine the likelihood you’ll be repaid?

Your credit score is a tool lenders use to determine the level of that risk, your creditworthiness, or how likely you are to repay the loan. As a result, this three-digit number carries significant weight throughout your adult life and determines how easy it is to make large investments, like buying a vehicle or a house. It determines your eligibility for a loan and the interest rate you get charged. Essentially, it’s the dividing line that determines the type of loan you qualify for.

Understanding Your Credit Score: From Its Significance to Its Fluidity

The three major credit bureaus—Equifax, Experian, and TransUnion—determine your credit score based on factors like your payment history, your credit usage, your mix of credit, and the length of your open accounts. While these factors are the basis of your score, there isn’t an industry-wide standard that every lender uses. Instead, there are general guidelines, with each lender determining their loan eligibility requirements or what they consider favorable scores. Generally, scores above 700 are considered “good,” while anything below 580 is considered poor.

This general guideline gives you a better idea of where on the scale your credit score falls and how a lender will approach the risk of approving you for a loan. It’s critical to remember that your score isn’t stagnant and will fluctuate and vary across the major credit bureaus and with every transaction reported. For example, your Equifax score might be 650, but your FICO score might be 610. Both numbers can fluctuate based on your financial activity, such as a reported late payment that causes your credit score to drop.

A salesman is shown speaking to a couple about bankruptcy auto loans.

Types of Bad Credit Car Loans

Every automotive loan operates the same way, but your credit score determines the type of loan you can get and the interest rate you will be charged. A high credit score proves you have a strong history of repaying your debts, making it less risky for the lender to lend to you. Lenders reward individuals with high credit scores by offering lower interest rates on prime or conventional automotive loans. For example, you may borrow $20,000 to buy a used Nissan, but the lender charges 7% interest on the loan because your credit score is over 780. The risk is minimal, making the interest rate lower.

Alternatively, a low credit score presents a higher risk, leading borrowers to lenders that offer bad credit car loans. These loans are characterized by higher interest rates—often north of 20%—that protect the lender. As you shop for a vehicle, you may qualify for a subprime or deep subprime loan based on your credit score. Subprime automotive loans are typically available to individuals with FICO scores between 580 and 619. Individuals with FICO scores below 580 are considered deep subprime borrowers.

Buy Here, Pay Here Dealerships and Bad Credit Car Loans

Dealerships sometimes promote their bad credit car loans with “Buy Here, Pay Here” or “No Credit, No Problem” advertisements. This signage is meant to entice customers, but it can be misleading and do more harm than good if you don’t know what questions to ask to ensure your financial future. Why? Not all bad credit car loans are equally beneficial.

Ideally, your bad credit car loan will help you establish your credit history and rebuild your credit. However, for this to happen, the lender must report your monthly loan payments to the major credit bureaus. Unfortunately, many buy here, pay here dealerships operate as the dealer and lender, meaning they don’t report your payment activity. As a result, your monthly loan payments have absolutely no impact on your credit score.

A popular used Nissan for sale, a blue 2020 Nissan Kicks SR, is shown driving in a city.

The Benefits of a Bad Credit Car Loan

Every individual faces the daunting task of establishing their creditworthiness, usually as they enter the workforce and face adulthood. Preparing for this responsibility or understanding how every financial decision can impact our footing is often challenging and overwhelming. Credit card companies inundate us with new credit offers in the mail, and our favorite retailers rarely let us leave the store without asking us to sign up for a credit card and receive a discount on our purchases. The lure is always there, but the repercussions are often misleading and ignored.

These lines of credit can give us a false sense of security and frequently lead to an accumulation of debt that’s extremely difficult to repay. A string of late payments, a few maxed-out credit cards, and numerous hard inquiries (a sign that you are applying for a lot of credit cards or loans at the same time) are all it takes to send a credit score spiraling. This can lead to a cycle of bad credit that makes it nearly impossible to secure an automotive loan that will put you behind the wheel of a car you desperately need for your commute. This can affect the jobs you can get, which will, in turn, affect your credit score even more. It can be a vicious circle.

Breaking a cycle of bad credit isn’t easy, but it is possible with the right bad credit car loan. If your credit score needs work, or you don’t have a well-established credit history, a bad credit car loan can be an excellent way to get your financial future on track. Unlike most prime lenders, those who offer bad credit car loans typically look at the bigger picture and offer more lenient eligibility requirements in exchange for paying a higher interest rate. In doing so, they give more customers the opportunity to invest in their futures without fear of being turned away because of a less-than-pristine credit history.