If you’re looking for a car loan for bad credit, you’d better be ready for the additional costs that come with it. There are more lending companies than ever marketing their services to people with bad credit since over a quarter of the buying public have lower than average credit. While this market is competitive, this doesn’t mean that you’ll find a cheap deal – at least, not the kind of deal people with good credit get. In many states, interest rates on car loans can go as high as 12.5%. On average, you’ll be paying about 8% interest on a car loan for bad credit.
Rates vary from lender to lender. This is due to the fact that all lenders are competing for business which includes the large demographic of people with bad credit. This is something you should bear in mind as you go shopping for a loan. Your last choice should be at the dealership. Though you’re more likely to get financing from the dealership, you can expect to pay higher interest rates than you’d get at a traditional lender. This is because dealerships act as retailers for several different financial institutions with whom they do business. The financial officers at the dealership work on commissions agreed to with these financial groups, and pass the expense onto you.
Traditional loan companies offer lower interest rates, but have less flexibility than car dealerships in who they lend money to. Since you’re dealing directly with the company that provides funds for your purchase, there’s no commission to worry about, and no haggling over options that the dealership’s finance manager would try to tag onto the loan agreement. However, you’re dealing with a single provider of money, under its lending policies, which limits you to its criteria for bad credit car loans. A lenders policies for financing are a matter of public record. All national lenders publish their conditions for their loan agreements with itemized listings of fees, taxes, and other costs you might face with bad credit. However, if you deal with a smaller, local lender, make sure you get their loan conditions in writing before you commit yourself to any contracts. Nearly all lenders will cooperate and, the ones who don’t are best to be avoided.
Before you sit down with a lender, you should know exactly where you stand, financially. Your credit-worthiness is expressed in your credit scores. Recorded by the credit reporting bureaus, Experian, TransUnion, and Equifax who gather all financial data from banks, credit card companies, etc., and boil that down into 3-digit numbers. This is such a highly regarded method for determining a potential borrower’s risk factors in defaulting, that all lending institutions in the U.S. rely on these numbers in order to approve, or deny, car loans. If you have bad credit, you should obtain your numbers and find out exactly how bad “bad” is.
Your credit scores can be ordered from the three credit bureaus and, since each has it’s own proprietary methods for producing these values, you should order all three and compare them. Though the exact numbers will differ, they fall into a range close enough to determine what credit category you’re in. With regard to bad credit, there is a big range of numbers that cover below average credit territory, and where you fall in that range can effect your ability to get approved and what interest rates you’ll have to pay. The closer you are to non-prime, the lower your interest rates will be.
How to mitigate some of the costs of car loans for bad credit are pretty easy, provided your budget is ready for it. The big trade-off for a lower interest rate is a big down payment. Putting, at least, 20% down on your car loan will reduce the balance on which you’ll be paying interest, and show the lender that you’re serious about the investment. This should push you toward less expensive car choices, which can also give you a boost with your loan agreement if your lender sees that you’re being responsible with your car purchase. When is appears that you’re about to bite off more than you can chew, a lender will consider investing in your loan a bigger risk.
Making car loans for bad credit work in your favor requires fairly straight-forward action. At first, your car loan will cause your scores to go down. This is because you’ve added a new debt load into your credit history, which always has a negative impact. But, as you make the monthly payments, there will be improvements in your scores over time. You must make all of your payments on time, in full, in order for this to work. Once the loan is paid off, without incident, you’ll see further improvement on your scores. Properly retiring the debt also leaves the door open to repeat business with that lender as you’ve built a reputation for being a dependable borrower. Any future dealings can include lower interest rates even if you haven’t quite made it to the prime lending category.
Finding the right lender is matter of shopping. You’re looking for a product as important as your car and you’ll have to find a lender that you can work with, and who will work with you. While it’s not an industry that trades on just a handshake, your behavior with a potential lender is important. Honesty, above all else, can help to move you closer to approval. Negotiations will be a part of the process, but they must be conducted in a respectful manner. If you do some of the legwork for the lender, you can also reduce some of the costs. Have your credit scores, annual credit report, and income information in hand when you go for your sit-down. Have references ready should they be needed. Taking an active role in your own car loan is the best way to ensure that a lender sees you for the grown-up that you are – someone who’s worth taking a risk on.