Auto Loans for People With Subprime or Bad Credit
When you apply for a car loan at a car dealership you will find that not all car dealers will use subprime auto lenders.
If your credit score is low, your loan will be considered high risk, and you will likely be denied financing. At this point, bad credit car buyers will turn to Buy Here Pay Here lots or car dealers who offer in house financing.
Most people with bad credit trying purchase a car will gladly accept the loan terms from these types of car lots. However, with the lowest credit score, you should consider the impact that this loan will have on your ability to repair your credit rating.
- These dealers offer to finance only to sell cars. They know people with bad credit will pay higher rates and longer terms to get the vehicle.
- These dealers are not looking out for your best financial interests. They expect that half of the car buyers they finance will miss payments and half of them will default on the loan altogether. The cost for repossessing a car by the dealer is typically calculated into the by here pay here loans. In most cases, this can seem unfair to the buyer.
- By using in-house dealer financing, you could miss an opportunity to build your credit score and repair your credit history.
- Remember that the main reason to finance a car loan with bad credit is to improve your credit. Even a high-interest car loan will fix your credit rating fast.
If you have a below average credit score, you can expect to pay on average three to five times more in interest that the typical borrower.
Building Credit Basics
In time everyone can build up a bad credit rating to qualify for the lower interest rates. Most people know the basics.
- Lower your debt to credit ratio or pay down your debt as much as possible.
- Pay your monthly payments on time.
- Maintain open credit accounts in good standing.
These credit building practices work well but require time and money to accomplish.
If you can put off buying a car for a time, then start setting aside the money you would be paying for your monthly car payment. This will give you a chance to collect a better down payment. Paying a larger down payment will automatically lower your payments no matter what interest rate your new car loan will carry.
What Low Credit Score Loans Will Cost You
If you have checked your credit score and then tried to get a car loan from a car dealer, you will probably notice they see a lower credit score than you see from other credit reporting agencies like Equifax, Experian, and TransUnion. That is because car dealers and auto lenders use an automotive based credit history. This automotive credit report shows in great detail your past credit experience with any auto loans you may have had.
When you shop for auto financing with a low credit score to buy a car, you will also find that loan financing APR rates from car manufacturers such as Ford, GM, Toyota and so on, will vary. Don’t accept the loan offer from the dealer without checking other lenders as well. Just because you are at a particular car dealer, and they offer their brand name financing, does not mean you are getting the best financing for your vehicle loan. Many people have received bad loan terms from major auto loan lenders.
If your credit score is below 550, a loan for a new car will cost you five time more in interest than someone with good to excellent credit.
Let’s look at it broken down from good credit to bad credit.
Average Credit Score Financing A New Car Loans For A New Car
Bad Credit 400 – 500 13.53% 18.98%
Subprime Credit 560 – 649 10.65% 15.72%
Average Credit 650 – 699 6.39% 9.47%
Good Credit 700 – 749 3.59% 5.12%
Excellent Credit 2.6% 3.4%
Last year the average rate of a subprime car loan was 10.65%
Remember that these high-interest loans should only be used for building credit. Refinancing these loans after your credit improves will lower your interest rate and shorten your loan term or lower your payments.
Use Your Car Loan to Build Your Credit Score; Refinance Is A Must.
Let’s look at a typical high-interest loan scenario of someone with a minimum credit score for a car loan. We will see how using high-interest loans can quickly build your credit score.
Starting with a credit score of 550 this person took out a loan at 18% APR and made a $1000.00 down payment. His monthly payments were $265.00 for 73 months.
At that time and with that credit score, this was the best loan deal he found. However, in five months time with on-time car payments and no other late payments on his other debts, his credit score rose to 640.
He checked with some auto refinancing agencies and found one to refinance his car loan at a much lower rate. With a plan to cut his debt he applied a $4000.00 payment to the principal and refinanced the car loan at 6.75% for 60 months.
The new loan also lowered his monthly car payments to $196.00.
With planning and hard work, you can rebuild your credit score in a short amount of time and get rid of those high-interest loans.
Here are some helpful tips to follow when searching for auto financing with a low credit score to buy a car.
- Start by searching dealer tricks and sales scams on the internet. Learn what the dealer is targeting when you walk onto the dealers’ lot. They will be surprised when their tricks do not work on you!
- Try to sell your old car yourself, instead of passing your equity to the dealers pocket. You will always get more for your car by selling it outright instead of trading it to the dealer.
- Don’t let the dealer work the vehicle deal by your monthly payments. Always go for the lower APR. Dealers will get you lower payments with longer loan terms and higher interest rates. This will cost you more in the long run.
- Do not accept ridiculous loan terms like six or seven-year terms. Remember that there is potential for financial trouble that can occur in that length of time and the interest paid will be excessive.
- Bear in mind that dealers will use scams like calling you a month or two after you take possession of the car and tell you that the loan fell through and you need to come in and redo your financing. This is a scam to lock you into a higher APR or higher payments on a different loan contract.
- Choose a car that you will be happy with for a long time. Save money for your next car after you pay off your car loan.
- Make extra payments to the principal and pay off the car as soon as possible.
We hope this information has helped you to become more car loan savvy.
Most people have fallen into bad credit problems by circumstances beyond their control. Loss of job, unexpected emergencies and events may have dropped your credit score, but there are things you can do.
Use credit wisely and use new car loans to work for you to build credit and will not add to the damage.
Valley Auto Loans is ready to help you with New and Used Car Loans, Subprime Car Loans, Auto Refinancing and more. Apply today! It only takes a few minutes. We will help you figure out what credit score is needed to buy a car in your circumstances.
We also offer many how-to tips for car owners and other auto financing aids to help you with whatever credit problems you have.
Let Valley Auto Loans get you on the road to better credit with new car financing.