Special Financing 101: Subprime and Nonprime Lenders

Whether you've experienced a hit in your credit score due to unfortunate circumstances or late payments, bad credit sometimes happens to good people and can make obtaining a vehicle difficult. With special finance loans from subprime and nonprime lenders, leasing or purchasing a car is possible for those with even the worst credit scores. According to the Federal Reserve, subprime loans may be used by those who find credit difficult to obtain and are a potential additional source of credit during negative economic situations. (1)

In 2015, CNBC reported an expansion of special finance options to credit-deserving borrowers in the auto and home markets. (2) Special finance rates reduce stress and help to secure a vehicle for those in need.

How Do Special Finance Loans Work?

Subprime and nonprime credit history is defined as limited or tarnished credit, which often makes it difficult for subprime borrowers to obtain a loan from a traditional lender. A special finance company works with subprime borrowers to lend them money for essentials such as a car.

Special finance rates are typically higher for subprime borrowers than traditional rates, but the rates of subprime and nonprime loans depend on the lender. (3) Also, term lengths will vary. Some lenders will propose a shorter length than traditional lenders, while others will give more time to borrowers to complete the loan payment.

How Can Special Finance Rates Help Me?

Some special finance lenders will not scrutinize your credit history when determining your loan. Instead, they'll view your employment as a positive determining factor in giving you a loan, since you are able to prove you can work toward paying it off.

Obtaining and paying off special finance loans can help subprime borrowers rebuild their credit scores. This translates to getting better interest rates and lower monthly payments in the future. On-time payments may also lead to refinancing through the lender, helping you to lower interest rates and monthly payments within your original term. If traditional lenders aren't willing to help you obtain a vehicle, a special finance company becomes a viable option that can get you into a car while putting you on the path to better credit.

Do You Qualify for Special Car Financing?

Securing a special finance loan is a good option if you have bad credit. Typically, these special finance companies will help you find a dealership that will sell a vehicle to someone who has a low credit score.

Although there is no one standard for all special finance companies, here are simple typical requirements that will help you qualify for special financing loans:

• A current resident of Canada or the U.S.
• At least 18 years old
• Has a gross income of at least $1500 per month (your pre-taxed monthly income)
• Has proof of U.S. or Canadian residency
• Has full time employment or earning a guaranteed fixed income
• Has the ability to insure a vehicle in their name

To see what kind of special financing you might qualify for, first find out what your credit score is. There three major reporting firms will provide you with a free yearly report. You can find these reporting firms at United States Federal Trade Commission website. Once you know what your credit score is, you can fill out an online application at any special finance company. It is also very common for a dealership to also offer in-house special financing. So instead of waiting for a company to search within their network to help you find a dealership, those types of dealerships can make it easy for you to get a vehicle and finance it at the same place.

Just because you do not have good credit, does not mean that you cannot find the right vehicle for you. Finding a reputable special finance company will help you secure a good special finance rate. They can then also help you find and finance the right vehicle for you.

Breaking Down 'Special Finance' Auto Loans

Securing an auto loan from a traditional lender can be challenging if you have bad or no credit. And paying cash for a used car severely limits your list of available options if money’s tight. Fortunately, special finance auto loans will enable you to purchase your next vehicle if you have a steady source of income, even if you credit is less than perfect.

How Special Finance Loans Work

Also referred to as buy here pay here loans, special finance auto loans are designed for consumers with bad or no credit. Special financing loans are handled in-house by the dealership’s financing department. When you apply, the special finance company determines the amount you can comfortably afford to pay either weekly, biweekly or monthly. Upon approval, you are allowed to choose from vehicles within a specified price range.

In most instances, the special finance company will not require a credit check. As a result, you can still qualify for a special finance loan with tarnished credit. However, the interest rates are significantly higher than what you’d find with traditional lenders because of the riskiness of the loan.

Is a Special Finance Loan Right for You?

If you’re in desperate need of an auto loan and can’t find a cosigner to help you get approved with a traditional lender, a special finance loan is a feasible option for purchasing a safe and reliable vehicle. A special finance loan may also be ideal if the dealer agrees to report account activity to the credit bureaus to help rebuild your credit.

Special Financing Types

Many traditional lenders, like banks and credit unions, only offer auto financing to borrowers with high credit scores, which makes it difficult for those with bad credit history to get approved for an auto loan. However, there are other options, called special finance loans, if you can't find financing with a traditional financing companies.

Most special finance loans are secured loans, which is when you offer a special finance company collateral such another vehicle or a house. If you can't pay off your special finance loan in these instances, the special finance company can take ownership of whatever your collateral is.

Bankruptcy loans and high risk auto loans are two more types of special finance loans. The type of bankruptcy may have an impact on the special finance rates you can get, and you'll have to show the lender that you'll be able to repay your loan. High risk auto loans, on the other hand, may have higher interest rates than regular auto loans since borrowers will either have bad credit or no credit.

Two less common types of special finance loans are lease buyout loans and car refinancing loans. Lease buyout loans are for borrowers who cannot pay off the rest of their loan. In that instance, a special finance company will buy out what's left on the lease and then the borrower makes payments to the special finance company instead. Car refinancing loans are a type of special finance loan known as "loans on loans," for borrowers who can't afford their installment amount. Special finance companies will lower the installment amount, but will sometimes increase the interest rate simultaneously.