If you have bad credit, it is still very possible to obtain an auto loan. The problem is not everyone out there has the intent to help you with that. Some offers may seem amazing at first glance, but if you look at the fine print, you may be getting yourself into an even worse financial situation. There are a few items that you need to look out for when completing an auto loan if you have bad credit. The most important thing to look at would be the sale price and interest rate. People commonly make the mistake of only looking at the monthly payment instead of the final cost to fully finance a vehicle. This various greatly in the three main types of auto loan distributers tailored for people with bad credit. They are as follows:
- Sub Prime Lenders
- Buy Here, Pay Here
Each one of these auto loan distributers have their pros and cons and can be a good fit depending on your financial situation. We’re going to discuss all three, state the pros and cons and a brief summary of what to look out for with each type. Let’s begin!
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Sub Prime Lenders
Sub prime lenders are lenders who specifically target individuals with bad credit. What sub prime means is that you have a credit score that is considered fair or bad. This would be for people who have a credit score that is in the lower 600 range and below. This sounds like it would be the best option for someone with fair or bad credit to obtain a car loan, right? Unfortunately this is not always the case. Sometimes the interest rates on these types of loans are very high and front-loaded. What this means is that the first year or so, you will be making payments almost completely on interest alone if you make the recommended monthly payment. The principal amount will barely be reduced until later down the line with consistent payments.
An example of this would be the loan I took out on my car before I fixed my credit. I was new to the car dealership game and didn’t properly educate myself before making a purchase. The total loan for the car was approximately $12,000. The interest rate on the loan I procured was 24% (this is VERY high). This was spread out throughout 4 years. Over the course of 4 years, I made just the agreed upon monthly payment. At the end of the deal, I spent $18,000 on the vehicle. This means I payed 150% of the vehicles value (not before depreciation). Please thank me for saving you from doing the same mistake (see how what I did to fix my credit). Here are some of the pros and cons of subprime loans.
Pros and Cons
- They literally will accept almost all applicants for some type of auto loan
- Good variety of cars to choose from
- Not limited to undesired vehicles
- Loans can be used at most traditional dealerships
- Most of these loans have a very high interest rates
- Some dealerships will restrict you to purchasing only certain vehicles with this loan
- Extended loan terms for a low payment that may end up costing more
There are some good sub prime lenders that really do have the customers best interest at hand. If you do go that route, try to look for one that will offer you an interest rate of below 10%. This will take some searching on your end, but the goal is to get a loan with the least amount of interest within a reasonable term. Not every sub prime lending company is out to get you, but make sure you do your research before going to the dealership. Stay within your budget and get a car you can afford without breaking the bank.
Buy Here, Pay Here
Buy here, pay here dealerships are another viable choice for those with credit challenges. What buy here, pay here means is that you are financing the car directly through the dealership and not through a bank or financial institution. This allows the dealership complete control on who they approve or deny for a loan. While this does look appealing, be sure to read between the lines. Sometimes, the offers really are too good to be true. Let’s look at some pros and cons with these types of loans.
Pros and Cons
- The dealer is in charge of financing, meaning more financial situations will be eligible for an auto loan
- Typically you will pay little to no money down for the loan
- The process of securing the loan is fairly simple compared to a traditional dealership
- Most offer a small window of time where you can return the vehicle free of obligation
- Not all buy here, pay here dealerships report to the 3 major credit bureaus
- GPS or vehicle tracking devices are sometimes installed on the vehicles due to the higher risk of default on the loans
- Interest rates on these vehicles are ofter hovering around the legal limit (VERY high)
- Many buy here, pay here dealerships do not offer warranties on the vehicles they sale
- Payments and terms are typically high or unfavorable
The vehicles at these dealerships are predominantly used, but in some cases they do stock new or newer vehicles. While the vehicles for the most part are in good shape, there have been quite a few reports of “lemons” being purchased at buy her, pay here lots. Lemons are cars that look like a good value (cosmetically) initially, but break down or have repeat defects shortly after purchase. If you are to get a vehicle at a buy here, pay here lot, I would highly recommend getting the vehicle inspected by a trusted mechanic. At the end of the day, it’s your money to lose in this case.
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Rent to Own
If you don’t have credit and feel as if you are not financially stable enough for a full auto loan, then rent-to-own financing is a good route to explore. While the payments are similar in size to a sub prime or buy here pay here payment, you still are essentially making payments on the car without it being tied to your credit. What this means is that you can either rent the car with the intention of owning it (making consistent payments), or you can make payments only as long as you need the car. This is great for those who are not yet financially stable and need a vehicle for a duration of time. Here are some pros and cons of rent-to-own vehicle financing.
Pros and Cons
- You do not have to pay interest on the vehicle as you are not borrowing money
- Repossessions will not impact your credit as these are typically not reported to the credit bureaus
- Credit score won’t stop you from getting the vehicle of your choice
- There will be no negative effect on your credit
- Typically the amount you pay for the vehicle is much more than the actual Kelly Blue-book value
- It will not help your credit in any way since they do not report to the credit bureaus
- Payment frequency is much higher than what you’d experience in either a buy here, pay here or subprime lender loan
The cars that are offered through these types of loans tend to be used with somewhat high mileage. However, most are cosmetically well taken care of and mechanically in good shape. While you won’t find something like a newer-model Audi at a rent-to-own location, you will find some quality, long lasting vehicles that will fulfill your needs. Most people come away satisfied overall with their experience dealing with these types of car dealerships. As previously mentioned, you will pay a premium for the vehicle of interest, but if you have not-so-good credit and are not financially stable, this would be a good route to go for reliable transportation.
It’s Your Money
At the end of the day, it’s your money going towards the purchase of a new automobile. Choose the auto loan type that works best for your financial situation. Remember, you want to get the most vehicle for your money. Try to get the vehicle you want to as close to Kelly Blue Book Price as you can (Visit www.kbb.com to see how much a vehicle is worth). If your only option is a loan with high interest rates, try to negotiate a contract where you can pay more than the required monthly payment (make sure that additional amount will. Make sure the extra money will apply to principle. That way, you are reducing the amount of money you are paying towards interest and will pay off the car much sooner than the loan term. Thank you for stopping by The Credit Dojo. As always, we hope you’ve learned something!
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