More and more bad credit auto loan ads these days bombard
debtors and other bad credit borrowers with the concept that
they can buy a car or truck no matter what their credit may
look like. Although most of these ads are based on truths, in
this article I will carefully review some of the bad credit
auto loan pit falls to be aware of, and help debtors to understand
how some of these systems work.
The direct finance business works as a good credit auto loan would from your
local bank, except borrowers with bad credit will be expected
to bring in a larger down payment and pay a higher interest
rate. Most local lenders, of course, will not make these loans
at all to borrowers with bad credit. Depending on the severity
of one's bad credit, down payments for these loans can range
from 20% to 50% and depending on the credit and legal limits
of the state one lives in, interest rates can range from 5%
to 26%. I have even seen in a few states extreme cases where
borrowers already owning cars use their vehicles as collateral
for very short-term loans. The effective interest rate can be
as much as 144% per year. These loans, sometimes called title
loans, offer a short-term loan at 12% per month, so when the
loan can not be paid off another loan at 12% must be taken.
Such lending is illegal in most states and even where allowed
I can think of almost no situation where taking out such a loan
would represent a prudent financial decision. In most cases
debtors with bad credit should expect to pay in the 7% to 18%
interest range. Amortization (the time needed to pay the loan
in full if all regular payments are made) choices offered may
only range from 2 to 4 years opposed to good credit borrowers
whose auto loans may extend for as long as 5 to 7 years. Certain
amortization schedules and higher interest rates combine for
payments that can be considerably higher than for those with
excellent credit. The good news is that if these loans are paid
on time they can also serve as tools for rebuilding credit.
Dealers who advertise their willingness to work with bad credit
auto purchases often ultimately finance the transaction with
one of the direct lenders as described above. Dealer's who finance
these loans internally sometimes combine of these things where
they secure an external financing source by guaranteeing apart
of the loan or allowing a part of the loan to remain unfunded
until certain loan payments are made.
The greatest abuses in bad credit auto lending come from dealers
who artificially inflate the prices of their cars and or the
interest rates charged for the financing. A common tactic is
for a dishonest dealer "specializing in bad credit purchasers"
to 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%. The reality would be that the borrower not only obligates
themselves to a contract at a very, very high interest rate
but that the under lying debt and price for the car bear no
realistic relationship to the value of the vehicle. This leaves
the borrower in a position that ultimately they will default
on the loan further ruining their credit. Otherwise they will
complete the contract by which time they may have paid double
or triple what they would have for the same car if they had
purchased it from a legitimate dealer at a legitimate price.
The watch word here is "caveat emptor," let the buyer
beware, some dealers advertising they work with poor credit
purchasers may be honest and forthright dealers. The best consumer
protection is knowledge. Research the true value of the cars
you are purchasing and try to pay only the wholesale cost plus
a $200 to $500 profit for the dealer. In only the rarest of
instances should you pay more than the retail price of the car.
Sometimes purchasing and financing a car through a dealer works to the buyers'
advantage. A company dealing in the finance operation only must
make all of their money from the financing where the dealer
also makes part of their money from the sale of the vehicle.
In some incidences the incentive to sell the vehicle for the
dealer and can mean financing concessions or less constringent
guidelines. Surprisingly, this emerges frequently as a situation
when purchasing a brand new vehicle. With a sizable down payment
it may actually be easier for borrowers with bad credit to obtain
financing for a new vehicle financed by the car manufacturers
own funding arms because of the company's incentive to sell
their new cars. Purchasers of new vehicles can also be aided
by the fact that interest rates are lowered in these transactions.
Newer cars generally merit lower interest rates than older cars
and amortization for new cars are longer too. The result maybe
that the payment for purchasing a new car may be the same or
lower than payments may be purchasing a used car.
With the popularity of the Internet and the mass marketing capabilities of
television, two new types of marketing have emerged for someone
with bad credit to obtain an auto loan. The most prevalent advertising
of this type on the Internet is a dealer network system. A potential
customer can click on a site advertising that they can purchase
a car regardless of their credit. The site requests certain
information about the borrower. This information is then passed
along to a dealer capable of working with purchasers who have
a problem in their credit history. How well these systems works
will depend on the dealer used. It can be possible that the
same referral network can have good and bad dealers. From the
consumer point of view, since no fees are involved, the only
caution is to understand the type of site you are working with
and what they're doing with your information. Individually these
systems usefullness will depend on their geographic coverage.
While some of the programs have 15 dealers and some have 1500
each network has it's own gaps in coverage. Some software systems
link many of these bad credit auto dealer networks to give the
buyer the best chance of connecting with a dealer who can help
them.
Application services, predominately found on the Internet, involve automatic
multiple submission of financial information to potential lenders.
In this case, the potential borrower fills out some in depth
financial information. The coordinator of the network then forwards
the information to lending sources that may be willing to make
the loan. When all works correctly, the borrower hears from
four lenders who then fight for the loan by competing against
each other to offer the best rates and amortization. For bad
credit auto loan candidates it may be more a case of one or
two lenders coming forward without much fighting, but where
not many sources exist this can be a great time saver.
In most of these cases, either the car dealers or lenders may contact the
borrowers directly. If you don't have a car in mind already
the dealer networks may be quite helpful in directing you to
someone who has an inventory of vehicles and the experience
and capability of securing a loan on the vehicle you wish to
purchase. If you already have a vehicle in mind and are having
trouble finding a financing source the multiple submission networks
may be helpful.
Even with all of these opportunities which will allow "almost" anyone
to obtain vehicle financing some borrowers will fall into the
category that can not. People with no down payment whatsoever
and bad credit may find it very difficult getting car financing.
Debtors in the middle of bankruptcy proceedings may find that
financing is not available until their bankruptcy case has concluded.
Others may be pleasantly surprised to find financing only to
realize payments on these loans beyond their means.
Don't be discouraged if your first few attempts at financing fail or if you
have to settle for your second or third choices of vehicles.
With perseverance, and if needed a little polishing up of your
tarnished credit, you should be able to obtain safe and reliable
transportation despite a previous bout of bad credit or bankruptcy.
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