What Are Guaranteed Auto Loans and How Do They Work?

If you’re in the market to buy a car, you’ve probably seen dealerships that advertise guaranteed financing, no-credit-check loans, or “buy-here, pay-here” deals. These are all names for the same type of loan. Guaranteed car loans allow people to buy cars regardless of their credit history. 

If you have bad credit or limited credit, these loans may seem like a good option. They may even be your only option. But these loans also have serious drawbacks, so don’t commit to this kind of financing lightly. This article covers how guaranteed car loans work, what you’ll need to qualify, the main disadvantages of these loans, and how to make the most of a guaranteed loan.

How Guaranteed Auto Financing Works

Car dealerships sometimes offer guaranteed financing to buyers who don’t qualify for conventional auto loans. These guaranteed loans are financed by the car dealer using different loan approval criteria than traditional automotive loans.

For a traditional car loan, the most important factors a lender considers are your credit score and your credit history. These help the lender determine how risky it is to lend you money. The bigger the risk, the more interest a lender needs to make the loan worth the odds. This risk analysis explains why borrowers with good credit usually qualify for much lower interest rates than those with poor credit do.

For example, borrowers with prime or super-prime credit (scores above 660), pay around 2.34-3.48% interest for new cars, and about 3.66-5.49% for used cars, according to a recent Experian report. By contrast, borrowers with subprime or deep subprime credit (scores below 501) pay around 11.03-14.59% interest for new cars and 17.11-20.58% for used cars. In other words, a borrower with a 485 credit score typically pays more than six times as much in interest as someone with a 785 score. The higher your interest rate, the higher your monthly car payment will be.

With a guaranteed car loan, the dealership won’t consider your credit score or your credit history. Instead, they’ll look at such factors as your current income, employment history, and ability to make a down payment. These loans are typically offered to borrowers with low credit scores, meaning that they’re in the high-risk category. As a result, guaranteed car loans have very high interest rates — usually much higher than rates for traditional loans.

Requirements for Guaranteed Auto Loans

Despite the name, approval for a guaranteed auto loan isn’t actually guaranteed for everyone. These loans don’t require a credit check, but you must still meet certain requirements to be approved. The specific requirements depend on the dealership, but many dealerships require at least some of the following to qualify for a guaranteed loan:

• Proof of your current income, such as a recent paycheck stub

• A list of your employment history for the past three years or longer

• Valid, government-issued identification

• Proof of residence, such as a recent utility bill

• A down payment — usually either a fixed amount or a percentage of the car’s price

• A list of two or more personal references

Contact the dealership before you go to find out their requirements.

How a Substantial Down Payment Can Help

Some dealerships advertise both guaranteed financing and no-money-down loans. These are usually two different types of loans. No-money-down loans are usually traditional car loans that require a credit check. Guaranteed auto loans almost always require a down payment. The amount of the down payment required depends on the price of the car you’re buying. 

If you can afford it, consider paying more than the minimum down payment. A larger down payment reduces the amount you’ll need to borrow to pay for the car, which can mean a lower monthly car payment. You might also qualify for a better interest rate. If you don’t have the money for a down payment, you may be able to trade in your old car instead. Most dealerships accept trade-ins and will count the value of the trade-in car as your down payment.

How a Co-signer or Collateral Can Help

If you have a relative or close friend who has good credit and is willing to cosign a loan with you, this can help you get a lower interest rate. A co-signer is legally obligated to make the loan payments if you don’t. If you don’t have anyone who can cosign for you, you may also be able to lower your interest rate by offering extra collateral for the loan.

Collateral is something that a lender has the right to take from you if you default on your loan payments. When there is collateral attached to a debt, the debt becomes a secured debt. Car loans are automatically secured debts. The car you’re financing is the collateral, and the lender can repossess it if you stop making payments. Offering to tie additional collateral to the loan, such as another car or a savings account, may help lower your rates. Remember, though, the lender can take the extra collateral if you don’t pay the loan.

Drawbacks of Guaranteed Auto Loans

The promise of guaranteed approval can sound great, especially to car buyers with less-than-perfect credit. But this approval comes at a price. One of the main drawbacks of guaranteed car loans is that these loans usually have much higher interest rates than traditional auto loans do. A higher interest rate means that your monthly car payment will be higher. It may also take you longer to pay off the loan. 

Another big disadvantage of guaranteed auto loans is that these loans usually don’t help you build credit. With most traditional car loans, if you make your car payments on time, the lender reports these timely payments to the credit reporting bureaus. On-time payments are the best way to increase your credit score — but only if those payments are reported. 

Dealerships that offer guaranteed loans don’t check your credit when you apply for financing, and they also usually don’t report your on-time payments to the credit bureaus. This can be a major disadvantage when you’re trying to rebuild your credit.

Yet another drawback of guaranteed car loans is the possibility of what could happen if you’re unable to pay the loan in the future. Many guaranteed loans charge steep late fees and penalties for past-due or missed payments. These lenders also tend to be quick to repossess your vehicle if you default. A repossession can severely damage your credit. 

Also, because of the high interest rate, much of your monthly payment goes toward paying interest instead of reducing the principal balance you owe on the loan. This means it could take a long time for you to build any equity in the car. Without a lot of equity, if the car is repossessed, your down payment and any other payments you made are just gone, with no car to show for them. Before you finance a car with a guaranteed loan, make sure you can reliably make your required payments.

How To Make the Most of Guaranteed Auto Loans

If guaranteed car financing is your only option, you can take some steps to protect yourself and make the most of the situation:

• Shop around: If you’ve been rejected for financing in the past, it can be tempting to take the first deal that you’re offered. Read any proposed loan terms carefully. Compare loans at several dealerships to find the best deal.

• Pay extra: Paying more than the minimum monthly payment on your loan will help you save on interest and help you pay your loan off faster. Don’t pay extra, though, if it means you won’t be able to pay other bills or build an emergency fund.

• Get advice: If you’re struggling to figure out which financing option is best for you, you don’t have to decide on your own. Schedule a free session with a certified credit counselor to discuss the best option to help rebuild your credit. 

Let's Summarize...

Guaranteed auto financing allows people to buy cars even if they don’t qualify for traditional car loans. These loans are financed by dealerships. Instead of using your credit history, these dealerships will look at your current income and employment to determine whether you qualify for a loan. You’ll likely need to meet minimum income requirements and pay a down payment to qualify. 

Guaranteed auto loans typically have high interest rates and fees. These loans also usually don’t help you build credit. If a guaranteed loan is your only option, shop around and read the fine print carefully to be sure you get the best terms.