When our tax refunds come in, we often wonder what to do with them. After all, getting a nice amount of cash back from the government doesn’t just happen every day. But there’s one purchase, in particular, you should consider putting your tax refund towards: A bad credit auto loan.
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Bad Credit Auto Loans And Down Payments
The most basic way to use your tax refund is to put down a down payment. To understand why, you need to understand how car financing works, and why it can be tough to get a bad credit auto loan.
Lenders evaluate anybody who applies for a loan on a variety of metrics. The most common, of course, is your credit score, a tool developed to boil down your credit history and future credit risk as a three digit number. For a lot of people, that score defines both the interest rates available to them and the overall terms of your loan. Depending on the lender, it can also dictate how much you’re allowed to borrow.
That said, while the credit score is important, it’s not the deciding factor in either the loans you receive or the terms you get for it. Just as important is how much fiscal responsibility you demonstrate, and part of that is having a down payment ready for your car. Having 20% of the total cost of your car handy is a lot more important than you might think.
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Why A Down Payment Matters
A down payment is important for a few reasons. The most basic is that a down payment for your car lowers the overall amount you need to borrow, also called the principal. The higher your total principal, the more your overall loan is going to cost you as you pay it off. Remember, lenders make money on loans by charging you interest, so the higher your interest rate and the higher your total principal, the more money is going to be coming out of your pocket.
Secondly, having a down payment proves that you’re willing and able to put your own money on paying off your loan. As popular as statements like “No money down!” are in ads, lenders prefer that those taking out the loan commit some of their own money. They believe that if somebody puts their own money towards a car, psychologically they’ll be more committed to making their payments and keeping their money safer.
Finally, it demonstrates to the dealer that you’re serious. However, understandably, it’s become harder and harder for a lot of us to put together 20% for a down payment, so it’s become less of a requirement.
Hence, the importance of your tax refund. A good tax refund puts you a lot closer to a 20% down payment, and the better treatment from both lenders and dealers that comes from being able to put your own money down for the car. And, of course, there’s the matter of pride; if we can pay for our cars, even just a bit, we’re happier for it.