types of financing

Types of Bad Credit Car Loans

Car loans offered through dealers fall into three general categories: Conventional, Sub-Prime, and Buy Here Pay Here. Conventional and sub-prime auto loans are similar. The dealer processes all necessary information (credit application, installment sales contract, proof of insurance) and then submits the loan applications to lenders for review. Once approved, the loan is packaged and sent to a lender for funding. The dealer receives payment in full for the amount financed, and the lender collects payments from the customers. This financing arrangement is known as indirect lending.

Conventional financing at dealerships serves FICO scores of 700 and above. These transactions are straightforward to process. Customers qualify for low interest rates and often purchase or lease a vehicle with no money down. Zero percent financing may also be available from some dealers through their OEMs on specific models.

The primary difference between conventional and bad credit car loans is the degree of scrutiny and stipulations required in order to approve and fund a loan. For example, the lender may call and verify employment information, require proof of income and residence, and ask for personal references for sub-prime customers.

The most talented and committed dealers offering sub-prime car loans operate special finance departments. The staff in these departments dedicate themselves to helping customers qualify for bad credit car loans. They are well versed with lender underwriting criteria and help guide the dealership's acquisition of used cars that fit within the parameters of these lenders.

Buy Here Pay Here car loans work differently and provide car financing for severely bad credit customers. The term "Buy-Here-Pay-Here" is literal. The dealer is the seller and the lender and offers in-house car financing for its customers. These dealerships set up an RFC, Related Finance Company, and establish a line of credit from a bank. The line of credit finances customers who purchase vehicles from the dealer. These dealers play a significant role in providing bad credit car loans. They have complete control over who gets a car loan and don’t rely on a third-party lender to approve and fund the loan.

Creditworthiness is secondary to other criteria such as stability, time at residence or in the area, employment, time on the job, downpayment, and debt to income ratio. In other words, Buy-Here-Pay-Here dealers consider someone's ability to pay over prior credit history. In Addition, a down payment is a must. If you are buying from a Buy Here Pay Here dealership, be prepared to have a down payment equal to 10 to 20 percent of the car's selling price.

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