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If you're having a hard time getting approved for an auto loan due to a poor or limited credit history, a guaranteed car loan may be worth considering. Guaranteed auto financing is typically offered by buy here, pay here dealerships instead of traditional lenders.
But while this type of financing comes with less stringent requirements, the costs and risks can be high. Here's what you need to know.
What Are Guaranteed Auto Loans?
Guaranteed auto loans, also known as no credit check auto loans and buy here, pay here financing, are designed for car buyers who don't meet the credit requirements for a traditional auto loan.
Instead of running a credit check, dealerships that offer this type of in-house financing determine your eligibility based on your employment status and income. Typical requirements include:
- Income: Minimums can vary, but you typically need to earn at least $1,500 to $2,000 per month before taxes.
- Down payment: You may need to put a minimum of 10% down on the vehicle.
- Documents: In addition to proof of income, you'll also typically need to provide a valid driver's license, proof of residency (such as a utility bill or lease agreement) and a list of personal references.
If you're considering a guaranteed auto loan, contact the dealership beforehand to get information about the eligibility requirements and required documentation, so you don't experience any delays in buying your new vehicle.
Risks of Guaranteed Auto Loans
While guaranteed auto financing may seem to be an easy solution if you have less-than-stellar credit, there are significant risks to consider.
Loans Are Expensive
Buy here, pay here loans are typically more expensive than traditional auto loans, both in terms of interest and fees, including exorbitant late fees and other penalties if you miss a payment.
Even if you opt for a less expensive vehicle, the monthly payment can still be a significant financial burden, especially if you're on a tight budget. If you take on more than you can afford, you may be at risk of defaulting on your loan.
What's more, a high interest rate means that a large chunk of your monthly payment goes toward interest charges instead of paying down the principal balance. As a result, there's a greater chance that the car will depreciate at a faster rate than you can pay down the balance, increasing your odds of having negative equity in the vehicle.
Dealers May Be Quick to Repossess
Both traditional and guaranteed auto lenders can repossess your vehicle if you stop making payments. But in general, buy here, pay here dealerships often resort to seizing your vehicle more quickly than other lenders.
While traditional auto lenders may wait two or three months before initiating repossession, some guaranteed auto loan dealers may start the process after a single missed payment.
It May Not Help Your Credit
While dealers that offer guaranteed auto loans may market their financing as a way to rebuild your credit, many of them don't report your loan balance or on-time monthly payments to the national credit bureaus.
That said, they may report negative items, such as late payments and repossession, which can damage your credit significantly.
Alternatives to Guaranteed Auto Loans
While a guaranteed auto loan may be tempting, the risks may outweigh the benefits for many car buyers. Here are some potential alternatives to consider:
- Get a cosigner. You may qualify for a traditional auto loan if you apply with a creditworthy cosigner. The cosigner agrees to make payments if you can't, reducing the risk you pose to the lender. As a result, the lender will consider both credit histories to make a decision.
- Work with a bad-credit lender. There are several online lenders that specialize in working with car buyers who have poor or limited credit. Take some time to shop around and compare several options to get an idea of what you qualify for, so you can avoid borderline predatory lending practices.
- Wait to improve your credit. If you don't absolutely need a new car right away, consider taking time to improve your credit before you apply for a loan. Start by checking your credit score and credit report for free with Experian to get an idea of where you stand and which areas you can address.
- Buy a less expensive car: Some traditional lenders may be more willing to work with you on a smaller loan. Depending on how much cash you have, you may be able to avoid the financing process altogether by buying a less expensive vehicle outright.
The Bottom Line
Guaranteed auto loans offer people with limited or poor credit an easy path toward car ownership, but they can be costly and make it difficult to improve your credit history. Before you consider working with a buy here, pay here dealership, carefully research all of your options.
Regardless of which path you pursue to buy a car, monitor your credit regularly to better understand how your credit score works and how your actions affect your overall credit health. Over time, developing good credit habits can increase your credit score and make it easier to qualify for affordable credit when you need it.