In most instances the car that’s financed is used as collateral for the loan. Since the loan is secured with the automobile, it lessens the risk that the lender assumes when financing someone with a poor credit history. If a person with credit problems can lessen the risk even more to the lender, the chances of procuring financing increase significantly.
Bad Credit Automobile Loan and the Down Payment
If a consumer defaults on a car loan, the lender will normally reposes the vehicle and sell it to a wholesaler or auction. The amount of money that the lender gets from a wholesaler is generally much less than the retail value of the vehicle. To minimize the risk, the lender will generally request a down payment that will offset the loss of default.
Thus the amount of the down payment is a big factor for approving a bad credit loan. A large down payment can improve the chances of a loan approval significantly. As the amount of money that’s put down on a car increases, it naturally decreases the amount financed. Hence as the down payment increases it simultaneously lowers the risk that the lender assumes.
Using a Cosigner for Poor Credit Car Financing
Another method of procuring a car loan when the lender is reluctant to approve a loan due to poor credit history is to use a cosigner. This reduces the risk because the cosigner becomes liable for the loan if the primary signer defaults. Naturally the better the cosigners credit rating, the easier it would be to procure a loan.
Since a cosigner significantly reduces the risk to the lender, using a cosigner can also result in a more favorable financing rate. Using a cosigner in conjunction with a large down payment can increase the chance of a loan approval significantly.
Demonstrate Financial Stability for a Car Loan
If the consumer has a poor credit rating, getting approval for a car loan is much easier if the consumer can demonstrate current financial stability. Some of the documentations that can be given to the lender that shows current financial stability may include
- current paystubs
- past tax returns
- checking and savings account statements
- credit card or loan statements
- debt to income statement
A debt to income statement that demonstrates the ability to repay the loan is a must. The other documents (paystubs, tax returns etc.) can help to support the validity of the debt to income statement.
When applying for a guaranteed car loan with poor credit history, it’s important to look at it from the perspective of the lender. If the consumer can demonstrate their ability to repay the loan and reduce the lenders liability, the chances of getting approval for a car loan will increase significantly.
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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