For many car shoppers, the biggest hurdle to buying a vehicle isn't selecting the right make and model or even coming up with enough money for the down payment. For 12% of the U.S. population with a FICO score under 550 and for the millions who don't have any credit history, the car buying process can come to a sudden halt. Traditional auto lenders are resistant to approve applications due to the increased risks of bad credit. That's why many car shoppers with compromised credit are tempted by the promise of "no credit check" car dealerships. Are no credit check car loans a good solution, or can they land you in hot water? We'll cover how these dealerships operate, the risks involved, and the alternatives for buying a car with bad credit.
What is a 'No Credit Check' Auto Loan?
No credit check auto loans are usually advertised at "Buy-Here-Pay-Here" (BHPH) dealerships. According to the Consumer Financial Protection Bureau, a “no credit check” auto loan is offered by dealerships that will finance auto loans in-house to borrowers with no credit or poor credit. Typically, dealerships work with outside lenders or the lending arms of automakers to help you secure a loan on the vehicle. BHPH Dealerships, on the other hand, sell the vehicle to you and finance it themselves. The only requirement to purchase a vehicle through a "no credit check" dealer is a steady income.
No Credit Check Auto Loan Process
Because there is no credit check or minimum credit requirements, the process to purchase a vehicle looks different at a Buy-Here-Pay-Here dealership than at a traditional dealership. Usually, a car shopper picks out a vehicle and then secures a loan to finance it, but BHPH dealers will first determine the vehicle the shopper is eligible to buy and then issue the auto loan. The process to purchase and finance a vehicle can move quickly compared to a traditional dealer, but while it sounds like an ideal solution, there are some risks to watch out for.
Risks of 'No Credit Check' Car Loans
There's no denying that 'no credit check' auto loans can be a saving grace for bad credit shoppers who desperately need a car, but they can also pose some serious risks. The first risk factor to consider is the higher costs of financing the vehicle. The Consumer Financial Protection Bureau cautions that a BHPH dealer acts differently than a traditional lender in that a bank or credit union will limit the amount it will lend to you based on the value of the vehicle. A BHPH dealer acts as its own bank and may not have limits in place. This means you can end up with a loan that is significantly higher than the actual value of the vehicle.
Interest rates are typically higher when getting a loan at a BHPH dealership compared to a traditional lender. According to Experian, you can expect to pay an APR rate that is as high as is legally allowed in your state. It's also important to watch for hidden fees in the contract that can as well as large down payment requirements.
In addition to the higher financing costs, there are a few other risk factors to consider before signing a contract with a BHPH dealership including unusual payment requirements and repossession risk. Many BHPH dealers will require customers to make payments in person, and just one missed payment can lead to instant repossession of the vehicle.
Car Loan Alternatives
A 'no credit check' car loan can serve as a last resort solution for some car buyers, but due to the risks, it's smart to explore all the alternatives first.
If the car purchase isn't an emergency, saving up for a substantial down payment on a vehicle can secure loan approval from a traditional lender. A cosigner with good credit can also provide the confidence a lender needs. Finding an affordable used car and saving up to buy it in cash is the best way to avoid the risks. Oftentimes, this route means choosing an older model than you imagined, but in exchange, you get the essential transportation you need.
Second-chance car loans are another way to secure auto financing. This type of loan considers factors outside of a car shopper's credit rating to determine approval. According to Experian, second-chance auto loans will take into account income and expenses, residency, employment stability, and other factors.
Online subprime auto lenders can be the best route for shoppers with compromised credit because they are willing to take on higher risk borrowers due to low overhead costs. No matter which route you choose, getting pre-approved via multiple lenders and comparing interest rates can provide hundreds of dollars in savings.