There is a growing trend in the current economy toward financing companies aiming for customers who qualify for bad credit. As more Americans find themselves struggling to meet expenses, more will find themselves having to deal with low credit scores which narrow the possibilities for financing some of the larger purchases in their lives in an affordable manner. Bad credit car loans become a regular part of the consumer experience. In an atmosphere that would encourage people to know more about financing a car – especially in a bad credit situation – the real situation is that most people will attempt to get car loans without knowing their credit standing, without a budget, and accept financing from the dealership where they’ll purchase the car. Going in cold on car loans with bad credit will end up costing people thousands of dollars they did not need to spend.
At the very foundation of attempting to get car loans is the budget. A household budget is bad credit car loan budget plan simply a matter of controlling money going out versus money coming in. Even a bachelor needs a household budget in order to ensure that all bills are paid in full, and no money is spent beyond what an income will allow. The biggest risk in exceeding one’s income is to pile on debt for non-essential expenses such as entertainment, dining out and expensive toys. Where a car loan is concerned, the supposition is that an individual needs to purchase a car that will take that person to and from work, to run errands, and to get to certain other places not in walking distance. An individual taking out a car loan just because that person wants a new car while a perfect-working vehicle sits in his, or her, garage is a foolish expense that will pave the way to bad credit and, possibly, bankruptcy. In order to take on the burden of a car loan, responsibly and intelligently, it has to be done with good reason and within the household budget.
Income level is lifeblood of the budget. No household can operate without a steady source of revenue coming in. Even for single people, a budget supported by a regular income is needed to keep them from dwelling in their parents’ basement well into adulthood. The vast majority of people in this country go to a daily job in order to maintain an income at any one of a number of levels. Some of these people rent apartments and own an economy car while others live in mansions and drive luxury cars. No matter what income level these people live at, they need to manage that income so what they spend does not outweigh what they make each month. This is especially important in maintaining a solid credit rating. If one cannot manage his, or her, income on a monthly basis, the common response to taking up the income slack is to make a credit card bear the cost of mismanaging one’s own funds. This is where bad credit takes its first breath of life.
Bad credit is revealed in a person’s credit score. The scores themselves are generated by a system that takes all credit-based activity, good or bad, and boils it down to a number from 300 to 850. The first, and most trusted scoring system, was designed by Fair Isaac Corporation which lends its name to the result of that system, the FICO Score. Although FICO has set an industry standard, the nature of scoring the credit for millions of people does not create a simple, proportional, scale.
Beginning at the top, where the fewest people reside, is the perfect credit (prime) category from 850 to 700. Only about 10% of borrowers fall into this range which offers the best interest rates. When the press speaks of the prime lending rate, they are describing the interest rate on lending under the most ideal of risk conditions. In order for an individual to occupy this niche, he or she have paid, and continue to pay, for all debts consistently on time and in full. Within the financial histories of these people, there must have been no delinquencies and very few investigations of their credit histories (referred to in the lending industry as credit pulling). Borrowers in this category will likely never have to worry about any sort of financing as they pose the smallest risk in lending money.
Good to average credit ranges in scores from 699 to 620, though the bottom score can fluctuate based on current economic conditions, locales, and population changes within that range. Some lenders view being below 601 as having poor credit while others may ratchet that number as high as 640. Competition in the lending market can alter the perceptions of what the bottom scores signify as some finance companies may assume greater risks than others in trying to sell car loans.
Where bad credit is concerned, the numbers cannot give the reasons behind that rating. When it comes to financing for a car loan, for instance, a credit investigation will be conducted by the lender which means it will request a copy of a borrower’s credit report as well as the current credit score. Industry-wide, this referred to as pulling a client’s credit and has the curious effect of lowering the borrower’s credit score. The effect is not significant and will play a much smaller part in determining an individual’s credit score than something like missing payments, or defaulting on a loan. The numbers falling below average, however, can be broken up by lenders into the two classes, subprime and deep subprime.
Subprime credit refers to credit scores below 600 (though, there are variances in that value) and carries with it certain difficulties in getting financing. Commonly known as poor or bad credit, having a credit rating at this level indicates problems in meeting debt obligations, carrying too much debt, or having too small a presence in the credit world. While the borrower with bad credit may have to pay higher interest rates than someone with average to perfect credit, the possibility of being approved for car loans is fairly good. A credit score falling below 600 may indicate a higher risk to a lender, there is still a high probability that financing will be approved by a given lender since there will likely be extenuating circumstances in their credit history that indicate to the lender that the risk is worth taking.
Deep subprime credit can be thought of as having very bad credit, or no credit. There is little chance of getting car loan financing unless a lender is specially equipped to deal with the level of risk such a credit rating carries. People who fall into this category are likely to have gone bankrupt at some point and never recovered financially. Others may be deadbeats who just don’t pay their debts. Sadly, there are people who look at credit as nothing more than a scam by which they can get a hold of some money and disappear when the bill comes due. Still, others are people who never held a credit account. These may be hard working people who meet all of their responsibilities head on – they simply never bought into the system that allows people to purchase something they normally couldn’t afford. Zero-credit financing does exist. But, this doesn’t mean that financial institutions offering programs to people with no credit are about to throw money at anyone asking for a car loan. The probability of someone with no credit getting a car loan is small and usually requires the intervention of a government, or non-profit, agency to assist in the auto loan process.
The credit score reveals only a partial picture of the borrower and certain aspects of a person’s financial activity can shed more light on how well they will meet the obligations of a car loan. Someone with bad credit, for example, might have the income to make the monthly payments required of a bad credit car loan and may have assets accumulated to cover the balance of the loan should something happen to their main source of revenue. A lender can take this into account when determining if that person meets the criteria for approval. Further, the auto loan applicant’s financial history may have included such emergencies as catastrophic illness, natural disaster, or other upheaval, that might have lead to a sudden drain on his, or her, cash reserves. While this may have caused some damage to that person’s credit, there may be indicators that the individual was able to do everything responsible people do to recover from such events. This can all be revealed in a credit report.
Anyone who has engaged in any financial activity that didn’t involve the exchange of cash, will have generated an annual credit report. This document contains the entire financial history of an individual from rent payments to mortgage payments, the opening of new credit card accounts to the failure to pay off old credit card debts. Although the report follows an individual’s financial transactions in minute detail, there is a chance that some entries in the report can contain errors which can be disputed and corrected. This can improve a person’s credit score depending on how significant that mistake might have been. A credit report can be obtained be obtained from anyone of the major credit reporting bureaus; Equifax.com, Experian.com, Transunion.com, or FreeCreditReport.com.
How a lender deals with bad credit before approving a car loan has a lot to do with the expectations of the borrower and what that borrower will do to follow through on their end of the agreement. A sensible client won’t try to get financing for a luxury vehicle that’s clearly beyond his, or her, ability to pay for within the time frame set by the car loan agreement.
Likewise, a lender won’t approve a loan for a car that is beyond the means of the borrower. There are differing views with regard to whether the prospective borrower should shop for the auto loan first, or the car. The type of car that is being financed can have an impact on the sort of financing a car buyer can get. But, what sort of financing is available to the buyer can impact the type and quality of the car being bought.
A balance can be struck, as in most things, between shopping for a car and a lender and someone who has bad credit can do a few things to ensure that the financing will go smoothly and the car purchase will result in a car that meets that person’s needs. Since every car manufacturer and dealership maintains an online presence, it’s possible to review one’s car choices before ever setting foot on a car lot. Such websites not only display their car specials, they often advertise car loan deals which include offers aimed specifically at people struggling with bad credit. With the ability to choose a car and a suitable price range far from dealership salespeople, it’s possible to make an informed choice on a vehicle that fits within a given budget. The ability to research the right vehicle is made easier by websites like Edmunds.com and Kelly Blue Book’s KBB.com. Since neither of these sites are in the business of moving product for any particular car dealer or manufacturer, they can provide clear data indicating the prices a prospective car buyer should expect to pay for a new or used vehicle. They can also narrow that information to cars being sold in any particular area of the country.
Realistic expectations are necessary in the purchase of a new, or newer, car is going to happen. Lenders are hesitant to approve bad credit car loans if the customer is looking at a car beyond his, or her, means. If pressed, a lender might approve financing to terms of five to seven years to make a high-priced vehicle affordable. But, a responsible lender will attempt to steer a new car-buyer to choices that are more in line with that buyer’s budget and income or, simply, not approve the application. Depending on who is financing the vehicle, the assumption of risk grows depending on the price of the vehicle being sought by the borrower and the ability to pay for the vehicle. People with bad credit are not always rejected out of hand for car loans if their incomes indicate that they can make the payments on a high-end car.
But, what lenders prefer to see in a customer with bad credit is someone who is looking at reliable transportation that he, or she, can pay for within a reasonable amount of time – 36-month and 48-month car loans being the most common terms. Since interest rates play a major role in how bad credit car loans will affect the pocketbook of a consumer, keeping the cost of the new car as low as possible without sacrificing dependability becomes a lender’s chief concern when it comes to approving a loan. Since the interest rate will be higher than prime due to a customer’s bad credit, shaving money off the price of a car can save hundreds, even thousands, of dollars off the total cost of the loan. Bad credit car loans mean higher interest rates – there’s no getting around it. But, wise shopping when it comes to financing means that a potential borrow
can avoid the worst possible interest rates in order to make that car loan more affordable. Since lenders do compete for business, they tend to offer bargains. Some of the bargains they offer are time-sensitive while others offer “teaser” rates on what are variable-rate car loans.
Special offers on car loans aimed at consumers struggling with bad credit are similar in concept to sales at department stores. Many offers come with the caveat of “for a limited time only” in order to drive car loan sales during certain times of the year. Low interest bad credit auto loan application, car crash financing, or no interest financing on bad credit car loans is one of the most common ways lenders bring new customers into their businesses. These bargain rates are offered for the first year on variable-rate car loans to draw in a new borrower, then climb to a higher rate for the remainder of the car loan’s term. This can represent the best of both worlds to the consumer with bad credit as it can make a car loan more affordable at the outset with lower monthly payments with time to prepare for the increase in payments which begin after the first year. The primary hazard to this sort of financing is that the rates can climb to levels that make payments difficult to afford… creating the risk of falling behind or defaulting on the loan.
All lenders are required to inform their customers upfront of all the conditions regarding any loans they make which most do even before they meet, face to face, with a new loan applicant. For people seeking bad credit car loans that won’t leave them broke and car-less, this places the responsibility of choosing the right lender and an affordable car loan directly in their hands. Lenders describe in detail their terms and conditions and make them available for viewing, either through their websites or in a printed material at their offices. When a borrower gets approved for a bad credit car loan, the assumption is that he, or she, has found the financing suited to their needs and has, effectively, the cash in hand to buy a car. This gives the borrower the option to purchase a car on any lot and walk away if he, or she, can’t find the right deal. This isn’t the case if that car shopper is going to the dealership for the loan.
Dealership financing has a few disadvantages over traditional lending institutions when it comes to approving bad credit car loans. Since a car dealership is not a bank, it acts as a mediary between banks and borrowers which creates additional costs to the individual seeking financing. There is also a tendency to sell loans to customers that might not be suited to the their needs, but makes more money for the dealership’s loan agent as he, or she, typically work on commission. For someone with bad credit, however, the dealership’s financing department may be the only option toward getting car loans. The dealership has connections to financing packages specific to certain vehicle makes, models, or sales exclusive to that car lot. While interest rates might be higher for bad credit loans on the car lot, there is a better chance of being approved since the dealership knows how to get that car back if the customer defaults on the loan.
Bad Credit car loans are an integral part of the modern economy as prices rise and incomes shrink. Among the car financing industry, the solution has been to make car loans more readily available to consumers whether they have bad credit, or not, by easing application standards, modifying how interest is charged and greater creativity in designing loan packages that more people can afford. Where a record number of lenders exists, there will be fierce competition for a piece of the market which includes those consumers with bad credit. Car loans aren’t handed out like samples at a supermarket. But, there is a thriving and diverse field of lenders willing to work with customers at all economic levels.