Auto loans for people with bad credit are difficult enough to obtain, yet oftentimes they still require a large down payment and higher interest rates. Sometimes, borrowers who already own a car may be forced to offer it as collateral for a short-term loan.
People with bad credit who avail of auto loans that require high monthly payments may find themselves defaulting on the loan and worsening their credit rating. By finding the right lending company, you will be able to obtain a car loan at reasonable rates even if your credit is bad.
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If you have a poor credit score, you may be forced to avail of bad credit auto loans. This kind of car loan has the following features:
Interest rate. People with low credit scores cannot avail of prime interest rates on their loan. This means that they may have to pay higher interest rates compared to borrowers with good credit. However, the interest rate is influenced not only by the borrower's credit score but also by the current state of the economy and competition among lending companies. Thus, you can shop around and look for the best rate even if your credit is bad.
Down Payment. Lending institutions often require people with bad credit to make a large down payment when they avail of auto loans. A large down payment means a smaller loan. This will reduce the risk to the creditor.
Amortization Period. While people with good credit are given 5 or more years to pay off their loan, borrowers with bad credit are usually allowed a shorter repayment period. They are often expected to repay the car loan in 2 to 4 years. Lenders are reluctant to approve the loan for a longer period.
Monthly Payments. Monthly car loan payments can be large if the interest rate is high and the repayment period is short. A large down payment can reduce the required monthly repayments, but in general people with bad credit are saddled with an unfavorable amortization schedule for their auto loan. This often makes it difficult for borrowers to keep up with loan payments.
Tips for Obtaining Bad Credit Auto Loans
People with bad credit can still obtain auto loans at reasonable rates. This can be done by having their parents, spouse or friend as co-signer for the loan. The co-signer assumes responsibility of paying for the loan in the event that the borrower defaults on the loan. Having a co-signer with good credit can lower the interest rate and provide a longer repayment period.
A secured car loan is also a good option for a borrower with low credit scores. By offering property or the car itself as collateral, you will be able to avail of more favorable rates. Take note, however, that the lender will repossess the collateral if the loan is not paid in full.
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