Men and women with problem credit or no credit history may have trouble financing a vehicle purchase. A possible solution is to do business with a financing company known as a subprime auto lender. Obtaining a loan from one of these organizations allows the person to buy a car and build a positive credit score by making timely payments.
Even a used car at a dealership costs a substantial amount of money. It’s difficult to find a used vehicle in very good condition with less than 100,000 miles priced lower than $8,000. Most people don’t want to deal with the possibility of an ongoing need for repair work and the chance of the vehicle breaking down on the highway. That stops them from buying a much cheaper car from an individual seller.
About Credit Scores
The credit score is generated as an equation including a variety of factors. One of the most important is the consumer’s payment history. Another is the amount of credit being used compared to what he or she has been granted. Abnormally high usage is a red flag to lenders.
Scores at or below 600 are considered fair to poor. A person with no credit history does not have a credit score and thus has no way to verify payment reliability to potential lenders. Subprime lenders step in to help consumers dealing with these issues.
There is one downside to the subprime loan. It generally has a higher interest rate than other vehicle financing options. The subprime auto lender has to charge somewhat more because the loans are riskier. The default rate is significantly worse, so a higher interest rate offers the lender some protection with the extra revenue.
Aspects the Lender Considers
Subprime lenders typically consider aspects like the person’s debt-to-income ratio. They must make sure an affordable payment arrangement is made by considering the payment-to-income ratio as well. The customer will probably need to provide more paperwork than would be the case with a traditional loan.
This is particularly true if the individual is self-employed. The lender will require proof of income, usually in the form of a tax return. If the person’s income has increased significantly since the most recent tax filing, proof of income may be provided with bank statements or deposit stubs. Subprime lenders may want bank statements in any case so they can verify how much money is coming in and how much is going out.