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There are many advertisements claiming that everyone can purchase a car no matter how bad their credit is as long as they apply for a bad credit loan. Though this is true, you should know that nothing is free and that bad credit auto loans have some drawbacks as well as some positive things that you should ponder before deciding whether to apply for a bad credit auto loan or not.
Down Payments And Higher Rates
Normally, borrowers with a bad credit rating are expected to make a larger down payment and pay a higher interest rate for bad credit auto loans. Down payments can range from 20% to 50% and interest rates can vary from 5% to 26%. These depend upon the level of the bad credit and the laws of the state in which one lives. In most cases, however, interest range for bad credit auto loans should be in the range of 7% to 18%. The amortization period (the time needed to pay the loan in full if all regular payments are made) may range from 2 to 4 years for people with a bad credit rating as against 5 to 7 years for those with good credit rating.
The credit rating can be improved if the bad credit auto loan is paid off in time. Sometimes the dealers of bad credit auto loans ultimately finance the transaction with one of the direct lenders and secure an external financing source by guaranteeing a part of the loan or allowing a part of the loan to remain unfunded until certain loan payments are made.
Beware of Scams and Abuse
There are some dealers who abuse the bad credit auto loans by artificially inflating the price of the vehicle and increasing the interest rates. Such dishonest dealers take a car normally sold for $3,000 and inflate the price to $6,000, take $1,500 down and finance the balance at 24 to 26%. Consequently, the under lying debt and price for the car bear no realistic relationship to the value of the vehicle and the borrower is obligated to a contract at a very, very high interest rate. Ultimately he will default on the loan and further ruin his credit rating. If he is able to complete the contract, he would have paid much more than if he had purchased it from a legitimate dealer at a legitimate price.
To avoid getting into such a situation, the borrower must do his homework thoroughly and get complete knowledge of the prices of the cars and try to pay only the wholesale cost-plus a $200 to $500 profit for the dealer. Only as an extreme step should one pay more than the retail price of the car. The watchword here is "caveat emptor," meaning “let the buyer beware”.
Take Advantage of Promotions
Sometimes the dealers and the vehicle manufacturers have to fulfill certain targets for sales of brand new vehicles and in this process; one may be able to get a good deal for bad credit auto loan. Moreover new cars also attract lesser interest rates and a longer amortization period. In such a case, the payment for purchasing a new car may be the same or lower than payment for purchasing a used car.
One should not be discouraged if the first few attempts at financing fail or if one has to settle for second or third choices of vehicles. One has to have patience and one should attempt to improve the credit rating to be able to obtain safe and reliable transportation, despite previous bad credit or bankruptcy.
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