With bad credit, car financing may seem impossible. Oddly enough, car financing may be one of your best bets for obtaining credit, and give you an opportunity to begin rebuilding a good credit rating. Unlike a line of credit, such as a credit card or an unsecured personal loan, financing a car is viewed differently by lenders. The car provides collateral, which means if you default on the loan, the lender still has something of value which can be repossessed and then sold, to satisfy the debt. Another factor which the lender takes into consideration is that you need a car for transportation – you can do without a lot of things, but transportation is essential. The lender knows that you’re going to do everything possible to make that payment. So, even with bad credit, car financing is a far less risky proposition. Let’s take a look at how to approach buying a car with bad credit at the least final cost to you … the interest does add substantially to the cost of the car over the term of the loan.
Before you start shopping the classifieds, you should be aware that banks won’t finance a car that’s more than nine years old. The resale value just isn’t there. This is why buying the newest car you can afford makes you – and the car – a better prospect for a car loan, particularly in the case of bad credit car financing. Consider also, that the value of any car depreciates most in the first two years. This means that choosing a vehicle that’s three years old optimizes the risk formula for both the auto financing company or bank, while giving you the best value in your transportation. A newer car is less likely to have costly major problems come up, such as needing a new transmission, requiring a big cash layout.
Check out consumer reports to see which cars tend to hold their value best. Also, check the Kelly Blue Book(R) value for the cars you consider to be possible candidates. Banks generally will only loan the low Blue Book value amount, which gives them the least risk. Even though the car you buy may be in great condition, with low miles and features which place it in the high Blue Book(R) category, the lender will still only commit to the low Blue Book(R) amount.
So, let’s say the car you want has a high book value of $5,000 and a low book value of $4,000. You’ll need to come up with a $1,000 down payment, either with a trade-in or sale of your old vehicle, with the remainder in cash, or a combination of funding. The bigger the down payment, the easier your bad credit car financing venture will be. Remember, the bank also wants you to have a vested interest in making good on the loan. This is also advantageous to your bottom line. The less you finance, the less interest you’ll pay over the term of the loan. Your monthly payment amount will also be less. Generally, with bad credit, you’re going to have a high APR attached to that loan.
Choosing a shorter term loan also reduces the final cost of the vehicle. You’ll save a lot of interest by opting for a two or three year loan, rather than the maximum term the lender offers. Ask the lender for the numbers on final cost between, for example, a two and three year loan and then be sure the payment is manageable, given your income.
Make every payment on time! With bad credit, car financing can soon help you rebuild a better credit rating and a better APR on your next loan!