Less than Perfect Credit

What to expect if your credit is less than perfect.

Regardless of credit, many people require a car for work. Car loans can be confusing and calculating interest rates and payments can seem daunting, even for people with perfect credit scores. For those with less-than-perfect credit, the only option is sometimes known as a bad credit car loan. These loans are offered to buyers with several stipulations attached, as well as several fees. 

Interest Rate

• Most bad credit car loans will come with a high interest rate. Depending on a buyer's credit, rates can vary from 9 to 21 percent annually. This extreme rate differential can be cumbersome on car payments, as the vehicle depreciates, no real equity is paid off on the car until the end of the loan. Rates such as these can mean paying only pennies on the principal balance each month, and are connected directly with how much of a risk the lender deems the buyer to be.

Down Payment

• Bad credit car loans typically come with high down payment requirements as well. While most car loans can be obtained with nothing out of pocket for qualified buyers, bad credit car loans often require down payments of $2,500 or more. The down payment is calculated on a percentage of the sales price of the vehicle. The higher the price of the car, the higher the down payment.
• • A Good Credit Score is 700 & Above. 

Loan Limits

• Debt-to-income ratios play a big part in any loan. If a consumer's debt load is low, and bills are paid on time, she can typically be approved for a car loan without any major issues. In a bad credit car loan scenario, however, the lender often sets a limit on the loan as well as some other stipulations about the vehicle to protect its interest in the collateral. The limit that the lender sets can also directly impact the percentage of the down payment needed to purchase the vehicle.

Stipulations

• Because bad credit car loans come at a high risk of default, the lender will provide for certain stipulations in regards to the year, make and model of the car. Lenders often do not want a car to be more than two years old, and require low mileage on the vehicle upon loan approval. The reasoning for this is because bad credit car loans come with a high risk of repossession, and the lender wants to secure an interest in the vehicle being resold for a profit. Newer vehicles have a higher resale value, so that must be taken into consideration when applying for a bad credit car loan.

Considerations

• Being in a situation where a bad credit car loan is a must can be a difficult one when taking into account how much money you will lose in high interest charges. It is wise to either have a high down payment or solicit a co-borrower who has good credit. This will help keep your interest rate lower for the term of the loan. If this is not possible, however, try to refinance the vehicle after owning it and making timely payments for at least 12 to 24 months. This can reduce interest and balance the equation of the loan in your favor.

Warning

• Bad credit car loans are normally accompanied by fast-talking car salesmen. Don't get roped into a deal on the first vehicle you find. Make sure you order a vehicle report on every used car to protect yourself against buying a "lemon." Also review the loan terms carefully from the financedepartment at the dealership, and make sure you are not on an accelerated payment or balloon payment car loan, where high payments are due at the end of the term.

Expert Insight

• Before visiting a dealership for a purchase, obtain a car loan from an outside lender. This will allow for you to have your financing completed and provide you with more buying power. Having a check in hand when walking into a car dealership takes the mystery out of how much you can spend, monthly payments and high-pressure sales people. Bad credit car loans can be found online or at your local bank or credit union.