For anyone attempting to get an auto loan with bad credit, the cost of financing their next car purchase will run a little higher than that for someone with good credit. That cost of credit is represented by an interest charge, which is expressed as a percentage of the amount being borrowed. Interest rates are set according to a national standard, the prime lending rate, modified by certain factors that include risk, location, and demographics. Due to standards set by the Federal Government for calculating interest, these values remain fairly consistent across the country and it’s possible for an individual borrower to approximate his, or her, interest rate ‒ on an auto loan, for instance. For people with good credit, the price of financing a car will carry an annual percentage rate, or APR, of from 3.25% to 4.5% depending on where they live and the current economic climate. An APR anywhere from 5% to 17% can accompany an auto loan for anyone with bad credit.
As the economy worsens, auto loans for people with bad credit are starting to dry up. Even though there is a greater chance than ever to get an auto with bad credit, those opportunities are shrinking with regard to getting low interest rates and the overall cost of getting a new, or newer, car goes up dramatically over the course of the loan. This puts consumers in a bind if they’re facing the need to purchase a car. How does a person struggling with bad credit find the lowest possible interest rate for an auto loan? The answer is, simply, research.
In order to make the best possible decision on anything, one must research that decision. The situation is no different for trying to negotiate an auto loan with bad credit, and it begins with a little research on one’s self. No consumer with bad credit arrived at that point for no reason and it’s very easy to figure out the circumstances that land a person in a bad credit situation. The most common reason people find themselves in struggling with bad credit is that they’ve spent more money than they earned. In order to plug the gap between monies going out and monies coming, they’ve resorted to unrestrained credit usage until the debt has become unmanageable. As more payments are made late, or missed entirely, credit scores are driven down and those people who have bitten off more than they can chew find themselves living with bad credit.
Climbing out of the hole is not as easy as falling in, of course, and it takes time and patience to dig one’s self out of bad credit. It’s important to remember that there’s no bad credit situation that qualifies as hopeless. Taking control of one’s credit begins with stopping the activities that make credit problems worse. Reigning in credit card debt is one of the first steps to improving credit scores. Where credit car debt already exists, it is a top priority to the card holder that all of his, or her, payments are made on time and in full. Incurring late fees has a negative impact on credit scores and having credit card debts handed over to a collection agency leaves even deeper scars on the holder’s credit score. Paying credit car bills on time is as important as paying one’s rent, utilities, insurance premiums, etc. Setting a lower standard to one’s credit payments is setting one’s self up for financial disaster which can lead to being denied credit in other very important areas such as a mortgage or auto loan. With bad credit as a result of misunderstanding the importance of credit, a consumer is left having to purchase big ticket items with the whatever money he, or she, has on hand.
While not adding to one’s debts is key to preventing a bad credit score from getting worse, closing unused credit card accounts does not improve credit scores. This is a common myth spread by industry professionals such as mortgage and auto lenders. According to Credit.com’s, John Ulzheimer, closing credit accounts to raise credit scores “is a clear number one on the list of credit myths”. The reality is that closing credit accounts can cause credit scores to go down due to the fact that comparative information will disappear from an individual credit history leaving a hole where credit activity once existed. Since credit activity is updated from month to month, having less credit activity to read ̶ particularly good credit activity ̶ makes existing negatives stand apart influencing a credit score for the worse.
For a person trying to get an auto loan with bad credit, the idea is to not add to the negatives that push his, or her, credit score down. Accruing new debt, opening new credit accounts, and incurring new delinquencies will shoot down a car loan even before it starts. With an economy that makes it relatively easy to buy more things than a consumer can afford, the traps that create bad credit become easy – even seductive – to fall into. For prospective auto loan applicant, cleaning up credit messes is only as important as not making new ones. When a consumer begins the process of getting an auto loan, the best thing for that person to do is go in with a healthy credit rating. But, when the need arises to apply for an auto loan with bad credit, there is hope for getting financing at decent interest rates if one doesn’t add to their financial woes. After all, why make a bad situation worse?