If you’ve got bad credit, you might think that you can’t get a car loan. However, nothing could be further from the truth; bad credit auto loans are available, and in fact becoming more common. That said, taking one on isn’t something you should rush into, either. Here’s what you should consider before taking on any auto loan for bad credit.
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Can You Afford It?
First off, you should sit down with your budget and work out what monthly payment is realistic for your budget. You may need a car to get to and from work and drop off the kids, but that doesn’t mean that you should just buy the first one you come across.
You need to know what’s a reasonable monthly payment, and leave yourself financial room to plan for the future. If a car payment will leave you living from paycheck to paycheck, that’s not a loan you should accept and probably not one you’ll be offered in the first place. Make a point of knowing what you can afford, or you’ll be faced with some tough financial problems in the future.
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What Will It Cost You Long-Term?
The next step is to shop around to a few lenders and see what they can offer you in terms of loan rates. Auto loans for bad credit will likely offer you rates three points or so above prime; a lot depends on your overall credit rating and how lenders weigh other factors, such as your current income and the overall amount you’re asking to borrow. For example, if you’ve got a hefty down payment, your credit history will matter less, because you want to borrow less money and can demonstrate you’re able to save properly for your purchases.
That said, you’ll still want to run the numbers and see what your loan will really cost you over the time you’re paying it. Auto loans, bad credit or otherwise, don’t come free; you pay for them with the interest added onto the total cost of the loan. The higher the interest, the more it’s going to cost you, and the longer the loan runs, the more interest you’ll pay. As a rule, the best loan for your financial health is the one that has the shortest term and the lowest interest rate, and you may have to negotiate to get that.
Will It Help Your Credit?
The final question to ask is whether the loan you’re taking out will help your credit. A good car loan on bad credit will help repair your credit; it gives you an opportunity to establish a consistent payment history and demonstrate that you’re good with the money you’re loaned.
But, as we’ve noted above, you need to set yourself up for a positive experience. You need to have the room in your budget to make that monthly payment every month on time and in full, and the room in your budget to handle setbacks without having to skip a payment. Similarly, your loan should be reported to credit bureaus, or else there’s little point.
So, if you need a car, get a car loan. But do it in a way that protects your credit and your interests.