Yes, You Can Get a New Car!
The Basics of Bad Credit
“Credit” is not a tangible item; rather, it is a representational rating of the likelihood you, as a borrower, will pay back money that you borrow. If someone has “Excellent” credit, it means that they have established a pattern of paying back their lenders in a timely and complete way. They are never late on their payments. On the other hand, if someone has “Bad” credit, it means that they have established a pattern of borrowing money from lenders and have consistently avoided paying them back.
Car Loans Interest Rates
Interest rates are additional fees a lender charges per month to keep an account open. For example, a $10,000 account with an interest rate of 5% means that the lender must make a pre-established monthly payment (let’s say $500). The remaining balance on the account after one payment is $9,500. At this point, interest is tacked onto the balance; 5% of $9,500 is $475, which brings the remaining balance up to $9,975. As you can see, even with a low interest rate, it can take a very long time to actually pay an account off.
Since lenders are more comfortable giving money to people with “Excellent” credit, those people will get lower interest rates since the companies know they are more likely to pay them back on time. Lenders make less money off of these borrowers. People with “Bad” credit will get very high interest rates, usually above 20%. If someone with “Bad” credit borrows $10,000 at an interest rate of 25%, and they pay $500 down on their first month, their remaining balance will be $12,000. In some cases, lenders will require higher monthly payments to offset this drastic balance increase. In this scenario, lenders make money off of bad borrowers every time the loan is compounded.
“Bad” Creditors Should Be Careful
Because interest rates for “Bad” creditors are so high, it is advised that persons with such a financial profile consider improving their credit score before financing a vehicle. Paying on a loan at an interest rate of 25% will likely interfere with their ability to pay on the loan, which will worsen their credit further, and lead to repossession of the vehicle itself.
Anybody with “Poor” or “Bad” credit should work on improving their credit score before financing a vehicle. This usually entails spending about 12 months of first paying off smaller unpaid debts, and then working on larger ones. Persons who have declared bankruptcy or already had a repossession are advised to spend at least 24 months correcting their credit profile.
Checking Car Loan Progress
Before paying down any outstanding debt, it is advised that borrowers obtain a copy of their credit report to confirm the validity of outstanding accounts attributed to their name. (This can be done by searching for “free credit report” on any Internet search engine.) The borrower should contact lenders about any debts they contest, and pay on due accounts immediately.
All legal US citizens are entitled to one free credit report per year. Borrowers working on improving their credit score should request a credit report every year, if not more often, to check their progress and keep an eye on their numerical credit score. This is important to remember because subprime lenders will only open accounts with borrowers who have a credit score of at least 500.
The Next Step: Finding Your Car Lender
Subprime or “high risk” lenders specialize in working with people who have “Fair” to “Poor” credit. Subprime lenders are accessible via loan brokers (usually employed at financial institutions) and on the Internet. Loan brokers can quickly obtain around three or four quotes for the borrower’s comparison, however, loan brokers tend to charge for their services. By contacting subprime lenders directly, the borrower will establish a relationship with the lender which (if the relationship is good) can even lead to a slightly lower rate.
Each quote is no-obligation, meaning that the borrower is not stuck with accepting a loan that does not suit their needs. Therefore, for borrowers obtaining their quotes directly from lenders, it is a good idea to take the time to shop around and get a few different quotes, just like a loan broker would. It takes a bit of time, but is helpful in the end.
Accepting an Offer
When the borrower has picked an offer, he/she must formally accept that offer and formally reject all other offers - all in writing.
Maintaining Good Car Loan Credit Health
It is now important from this point forward to make sure all monthly payments are timely; habitually paying on such a large loan can dramatically improve one’s credit score. Not only do you have a great new car, you’re also on your way to good credit health!
Obtaining a car loan with bad credit is within your capabilities. However, to find the best rate, a little work is required. There are many ways to secure auto loan financing. If you have bad credit, the odds of getting a super low rate are unlikely. Yet, various lenders offer comparable rates. Here are a few tips on finding a decent auto loan rate with bad credit.
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